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July 02, 2015 Practice Points

Ninth Circuit Rules in Benko v. Quality Loan Service Corp.

The circuit court vacated the district court’s Rule 12(b)(6) dismissal and remanded the case to Nevada state court

by Matthew Mall

In a published opinion issued on June 18, 2015, the United States Court of Appeals for the Ninth Circuit held that class action plaintiffs should be permitted to amend a complaint after removal to “clarify” or “elaborate on” issues pertaining to federal jurisdiction under the Class Action Fairness Act (CAFA). Benko v. Quality Loan Service Corp., No. 13-15185 (9th Cir. June 18, 2015). Because the plaintiffs’ post-removal amended complaint contained allegations satisfying CAFA’s “local controversy” exception, the Ninth Circuit vacated the district court’s Rule 12(b)(6) dismissal and remanded the case to Nevada state court. 

The plaintiffs in Benko filed a Nevada state class action against Meridian Foreclosure Services and five other defendants, asserting claims arising from the defendants’ roles as trustees in private foreclosures of real property securing the class members’ loans. Meridian, the only defendant domiciled in Nevada, removed the complaint pursuant to CAFA and moved to dismiss for failure to state a claim. In response, the plaintiffs moved to remand under CAFA’s local controversy exception, 28 U.S.C. § 1132(d)(4)(A), and subsequently sought leave to amend the complaint to allege additional facts supporting the application of that exception. The district court denied the plaintiffs’ motions to remand and amend and granted the defendants’ Rule 12(b)(6) motion to dismiss.

On appeal, the Ninth Circuit focused on whether the district court should have considered the plaintiffs’ amended jurisdictional allegations to evaluate the local controversy exception. Relying on Sparta Surgical Corporation v. NASD, 159 F.3d 1209 (9th Cir. 1998), the defendants argued that courts must analyze jurisdiction based only on the pleadings filed “at the time of removal,” and cannot consider allegations in post-removal amendments. The Ninth Circuit distinguished Sparta Surgical on the basis that the Benko plaintiffs did not seek an amendment to “avoid federal jurisdiction” but rather to “elaborate” on information “directly related to CAFA’s local controversy exception.” And because a class action complaint “originally drafted for state court … may not address CAFA-specific issues,” the Ninth Circuit concluded that “plaintiffs should be permitted to amend a complaint after removal to clarify issues pertaining to federal jurisdiction under CAFA.” The court did not define the scope of this rule but held that the district court abused its discretion by denying the plaintiffs leave to amend the complaint.

The court then reviewed the plaintiffs’ amended allegations and determined that they satisfied the local controversy exception. The key issues were whether, for purposes of 28 U.S.C. § 1132(d)(4)(A)(i)(II), defendant Meridian’s conduct constituted a “significant basis” for the plaintiffs’ claims and whether the plaintiffs sought “significant relief” from Meridian. The Ninth Circuit interpreted the statutory term “significant” to mean “important” or “fairly large in amount or quantity,” and then applied that definition by comparing the allegations against Meridian to the allegations against the other defendants. Relying on the plaintiffs’ amended allegations that Meridian conducted “15–20%” of the total debt collection activities at issue and faced potential damages of $5 to 8 million, the Ninth Circuit concluded that Meridian was a “significant” local defendant, thus satisfying CAFA’s local controversy exception.

In dissent, Judge J. Clifford Wallace opined that the majority erred by departing from the “bright-line” rule that jurisdiction must be analyzed on the basis of the pleadings “filed at the time of removal without reference to subsequent amendments.” Judge Wallace forecast that the majority’s rule would frustrate Congress’s intent that the local controversy exception be a “narrow one … drafted to ensure that it does not become a jurisdictional loophole.”

The majority’s opinion in Benko arguably establishes a circuit split on whether post-removal amendments may be considered to contest CAFA removal jurisdiction. See, e.g., In re Burlington N. Santa Fe Ry. Co., 606 F.3d 379 (7th Cir. 2010) (holding that plaintiffs cannot defeat CAFA jurisdiction by a post-removal amendment to remove class allegations and noting that “allowing plaintiffs to amend away CAFA jurisdiction after removal would present a significant risk of forum manipulation”); Cedar Lodge Plantation, LLC v. CSHV Fairway View I, LLC, 768 F.3d 425 (5th Cir. 2014) (“hold[ing] that the application of the local controversy exception depends on the pleadings at the time the class action is removed, not on an amended complaint filed after removal”). Unless the Supreme Court resolves this conflict, counsel on both sides should be aware that CAFA-related jurisdictional facts may not be settled at the time of removal.

Matthew Mall is a partner with Parker Poe in Raleigh, North Carolina.

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