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Court Misapplied ‘Local Controversy’ Exception

In plaintiffs’ class action suit alleging defendant real estate appraisers cooperated in defendant mortgage lender’s scheme to use a suggested appraisal value so loans were “underwater” from their inception, the district court could aggregate the named defendant real estate appraisers for purposes of deciding to remand the action to state court under the “local controversy exception” of the Class Action Fairness Act, but the 4th Circuit vacates the remand order because the district court erred in adding in the unnamed appraiser defendants.

In essence, plaintiffs’ complaint alleges Quicken Loans originated unlawful loans in West Virginia and that defendant appraisers were complicit in the scheme. Plaintiffs allege that, before defendant appraisers conducted an appraisal, Quicken Loans would furnish them with a suggested appraisal value. Then, after purportedly conducting an appraisal, defendant appraisers arrived at the same appraisal value as the suggested appraisal value. According to plaintiffs, the borrower would then close on a loan that was underwater from the beginning.

Plaintiffs filed their lawsuit in state court and defendants removed the suit to federal court, claiming the federal court had jurisdiction under the Class Action Fairness Act, 28 U.S.C. § 1332(d). The district court granted plaintiffs’ motion to remand based on the local controversy exception to CAFA, and defendants appealed.

The elements of the local controversy exception are: 1) more than two-thirds of the members of the proposed plaintiff class are citizens of the state where the suit was filed originally; 2) at least one defendant a) is a defendant from whom members of the plaintiff class are seeking “significant relief,” b) is a defendant whose conduct forms a “significant basis” for the proposed plaintiff class’s claims and c) is a citizen of the state in which the action originally was filed; 3) the principal injuries stemming from the conduct alleged in the complaint occurred in the state where the action was filed originally; and 4) in the three years before the filing of the class action complaint, no other similar class action was filed against any of the defendants on behalf of the same or other claims.

The parties agree that factors one, three and four of the local controversy exception are satisfied. It is the second element – the “at least one defendant rule” – on which the parties are unable to agree. The sole issue before us is whether defendant appraisers qualify as a significant local defendant. According to Quicken Loans, it was improper for the district court to aggregate defendant appraisers for the purpose of satisfying the “at least one defendant’ portion of the local controversy exception.

We are unable to agree with Quicken Loans’ suggestion that the “at least one defendant” factor must mean only one defendant. Under common parlance, the term “at least” permits a reading that more than one defendant could satisfy the stated criteria. To conclude otherwise would lead to an absurd result. Quicken Loans’ reading would also produce an outcome that is demonstrably at odds with clearly expressed congressional intent.

Here, where there is no question that all of the named defendant appraisers are citizens of the same state where the action originally was filed, all of the plaintiffs are citizens of the same state where the action originally was filed, and the principal injuries stemming from the conduct alleged in the complaint occurred in the state where the action originally was filed, we are convinced that this is a truly local controversy. It was proper for the district court to aggregate the named defendant appraisers for purposes of the local controversy exception. But the district court went further than that: it also combined the absent members of the putative class. Therein lies the problem. Because the class of unnamed defendant appraisers is not a party to this lawsuit, it was improper for the district court to consider them in deciding whether plaintiffs had satisfied the “at least one defendant’ requisite of the local controversy exception.
We are left with the question whether the named defendant appraiser met the “at least one defendant” portion of the exception. But, we are unable to make that determination on the record before us. We remand this action to the district court to make that decision.

Vacated and remanded.

Quicken Loans Inc. v. Alig (Floyd) No. 12-342(L), Dec. 19, 2013; USDC at Wheeling, W.Va. (Bailey) Meier Feder for Quicken Loans Inc.; John W. Barrett for plaintiffs. VLW 013-2-241, 14 pp.

VLW 013-2-241

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