Nichols v. Chesapeake Operating

FILED
United States Court of Appeals
UNITED STATES COURT OF APPEALS Tenth Circuit
FOR THE TENTH CIRCUIT March 7, 2018
_________________________________
Elisabeth A. Shumaker
Clerk of Court
BILL G. NICHOLS, on behalf of himself
and all others similarly situated,
Plaintiff - Appellant,
v. No. 18-6006
(D.C. No. 5:16-CV-01073-M)
CHESAPEAKE OPERATING, LLC; (W.D. Okla.)
CHESAPEAKE EXPLORATION, LLC,
Defendants - Appellees.
_________________________________
ORDER AND JUDGMENT*
_________________________________
Before LUCERO, BALDOCK, and BACHARACH, Circuit Judges.
_________________________________
Bill Nichols appeals from a district court order denying his motion to abstain and
remand to state court in this putative class-action suit against Chesapeake Operating,
LLC and Chesapeake Exploration, LLC (collectively, “Chesapeake”). Exercising
jurisdiction under 28 U.S.C. § 1453(c)(1), we affirm.
*
After examining the briefs and appellate record, this panel has determined
unanimously to honor the parties’ request for a decision on the briefs without oral
argument. See Fed. R. App. P. 34(f); 10th Cir. R. 34.1(G). The case is therefore
submitted without oral argument. This order and judgment is not binding precedent,
except under the doctrines of law of the case, res judicata, and collateral estoppel. It
may be cited, however, for its persuasive value consistent with Fed. R. App. P. 32.1
and 10th Cir. R. 32.1.
I
Nichols is a royalty owner in Oklahoma natural gas wells owned in part or
operated by Chesapeake. In August 2016, he sued Chesapeake in Oklahoma state court
for underpayment or non-payment of royalties. He sought class certification of certain
“Oklahoma Residents,” which he defined using a four-part test:
Persons to whom, from January 1, 2015 to the date suit was filed herein,
(a) Chesapeake mailed or sent each monthly royalty check on an Oklahoma
well to an Oklahoma address (including direct deposit); (b) Chesapeake
mailed or sent a 1099 for both 2014 and 2015 to an Oklahoma address;
(c) the Settlement Administrator in Fitzgerald Farms, LLC v. Chesapeake
Operating, Inc., Case No. CJ-10-38, Beaver County, Oklahoma mailed or
sent a distribution check and 1099 to an Oklahoma address; and[ ]
(d) except for charitable institutions, were not subject to the Oklahoma
Withholding Tax for Nonresidents on royalties paid in 2014 to the date suit
was filed.
Chesapeake removed the case to federal court based on the Class Action Fairness
Act (“CAFA”), which grants district courts original jurisdiction over class actions
involving at least 100 proposed class members, more than $5,000,000 in controversy, and
the presence of any plaintiff class member who is a citizen of a State different from any
defendant. See 28 U.S.C. § 1332(d)(2)(A), (d)(5)(B). In regard to citizenship,
Chesapeake pointed out that its principal place of business is in Oklahoma, thereby
making it an Oklahoma citizen, see § 1332(d)(10), and that there was a class member that
met Nichols’ resident definition—Austin College, a Texas citizen.
Nichols soon filed a motion arguing that CAFA’s home-state exception required
the district court to remand the case to state court. This exception requires a district court
to decline jurisdiction if “two-thirds or more of the members of all proposed plaintiff
2
classes in the aggregate, and the primary defendants, are citizens of the State in which the
action was originally filed.” § 1332(d)(4)(B). Nichols proffered evidence to show that at
least two-thirds of the proposed class members shared Chesapeake’s Oklahoma
citizenship, including the declaration of statistician Joseph Kadane, Ph.D., who randomly
selected 100 royalty owners from “a spreadsheet containing 28,929 unique records of
royalty owners paid from Oklahoma wells and who have an Oklahoma address.” Of the
100 royalty owners comprising Kadane’s sample, there were 13 trusts, 7 entities, and 80
individuals.
To obtain citizenship information about those royalty owners, Nichols employed a
marketing research firm and a private investigator. The research firm successfully
surveyed 54 of the sample’s royalty owners. It asked individuals whether they
considered themselves to be Oklahoma citizens and whether they planned to move from
Oklahoma in the near future. And it asked businesses whether they were organized or
headquartered in Oklahoma. The firm did not propose any questions about trustees or
trust beneficiaries.
Based on the survey results, Nichols’ counsel determined that 95% of the sample’s
royalty owners were Oklahoma citizens “because the data shows indicia of Oklahoma
citizenship with no conflicting data of citizenship elsewhere.” Based on that 95%
determination, Kadane performed a statistical analysis and concluded that “it is more
likely than not that more than 67% of the members of the [entire] proposed plaintiff class
are Oklahoma citizens.”
3
The district court was not persuaded, finding three significant flaws in the
evidence. First the district court noted that neither the survey data nor the skip-trace
investigation provided information as to the citizenship of trust beneficiaries or trustees—
important components of a trust’s citizenship.1 Second, the district court found that a
number of individuals identified as Oklahoma citizens were actually deceased, with no
information provided as to heirs’ citizenship. Finally, the district court found that
Nichols’ counsel had an “insufficient basis” for determining that some members of the
random sample were Oklahoma citizens.2 Accordingly, the district court denied Nichols’
motion to abstain and remand, finding he had not shown the applicability of CAFA’s
home-state exception by a preponderance of the evidence. Nichols now appeals.
II
We review de novo the district court’s interpretation of CAFA’s home-state
exception to jurisdiction. See Woods v. Standard Ins. Co., 771 F.3d 1257, 1262
(10th Cir. 2014). “CAFA was enacted to respond to perceived abusive practices by
plaintiffs and their attorneys in litigating major class actions with interstate features in
state courts.” Id. (quotation omitted). Thus, “once a defendant establishes [CAFA]
1
See Conagra Foods, Inc. v. Americold Logistics, LLC, 776 F.3d 1175, 1181
(10th Cir. 2015) (explaining that “[w]hen a trustee is a party to litigation, it is the
trustee’s citizenship that controls for purposes of diversity jurisdiction” as long as the
trustee is a real party in interest, and “[w]hen the trust itself is party to the litigation,
the citizenship of the trust is derived from all the trust’s ‘members,’” which “includes
the trust’s beneficiaries”), aff’d sub nom. Americold Realty Trust v. Conagra Foods,
Inc., 136 S. Ct. 1012 (2016).
2
For instance, the skip-trace reports indicated that only 35 of the sample’s
class members had Oklahoma driver’s licenses and that 37 members had non-
Oklahoma addresses.
4
removal is proper, a party seeking remand to the state court bears the burden of showing
jurisdiction in federal court is improper under one of CAFA’s exclusionary provisions.”
Id. Because Nichols concedes the propriety of removal, he must show the applicability of
a CAFA exception by a preponderance of the evidence. See Mondragon v. Capital One
Auto Fin., 736 F.3d 880, 884 (9th Cir. 2013); Vodenichar v. Halcón Energy Props., Inc.,
733 F.3d 497, 503 (3d Cir. 2013); In re Sprint Nextel Corp., 593 F.3d 669, 673 (7th Cir.
2010); see also Dutcher v. Matheson, 840 F.3d 1183, 1189, 1190 (10th Cir. 2016).3 “The
preponderance of the evidence standard requires the party with the burden of proof to
support its position with the greater weight of the evidence.” Nutraceutical Corp. v. Von
Eschenbach, 459 F.3d 1033, 1040 (10th Cir. 2006) (footnote omitted).
Nichols contends that a rebuttable presumption of citizenship arises from his
allegation that the proposed class members are Oklahoma residents. And because
3
Nichols suggests that in order to meet his burden, he must make only “some
minimal showing” that at least two thirds of the proposed class members are
Oklahoma citizens. Reece v. AES Corp., 638 F. App’x 755, 769 (10th Cir. 2016)
(unpublished). In Reece, a panel of this court observed, in the context of CAFA’s
local-controversy exception, 28 U.S.C. § 1332(d)(4)(A), that although “[s]everal of
our sister circuits have required plaintiffs to establish the elements of a CAFA
jurisdictional exception by a preponderance of the evidence[,] [s]ome district
courts[ ] . . . have required less proof, embracing a reasonable-probability standard or
something akin to it.” 638 F. App’x at 768 (emphasis added; citations omitted). The
Reece panel declined to embrace either approach, and instead selected a burden it
found common to both, which, as Nichols posits, requires “some minimal showing of
the citizenship of the proposed class at the time that suit was filed.” Id. at 769
(quotations omitted). We conclude, however, that a more definitive standard is
warranted, and we choose to follow our sibling circuits in their use of the more
exacting preponderance-of-the-evidence standard. That standard is consistent with
the “strong preference that interstate class actions should be heard in a federal court
if properly removed by any defendant.” Dutcher, 840 F.3d at 1190 (quotation
omitted).
5
Chesapeake did not offer evidence that more than one-third of the proposed class
members are not Oklahoma residents, Nichols says, the district court was required to
abstain. To support this contention, he cites the Sixth Circuit’s majority opinion in
Mason v. Lockwood, Andrews & Newnam, P.C., 842 F.3d 383 (6th Cir. 2016), cert.
denied, 137 S. Ct. 2242 (2017). The Mason majority reasoned that because “the law
affords a rebuttable presumption that a person’s residence is his domicile,” id. at 390, and
because state citizenship is based on domicile, citizenship could be presumed from
residence—a transitive proposition (i.e., if A = B and B = C, then A = C). The majority
stated that this proposition was compelling from a policy standpoint: “Affording the
moving party a rebuttable presumption of citizenship based on residency avoids the
exceptional difficulty of proving the citizenship of a class of over 100 individuals, given
the nature and timing of the citizenship inquiry under the local controversy exception.”
Id. at 392-93.
The dissent pointed out that triggering a CAFA exception based on the mere
allegation of residence conflicted with the federal courts’ “strict duty to exercise the
jurisdiction that is conferred upon them by Congress.” Id. at 397 (Kethledge, J.,
dissenting) (quotation omitted). And given that abstention had long been considered “an
extraordinary and narrow exception to that duty,” id. (quotation omitted), the dissent
concluded the better approach was to follow other circuits and require “at least some facts
in evidence from which the district court may make findings regarding the class
members’ citizenship.” Id. at 397-98 (quotation omitted). It cited, among other cases,
the Tenth Circuit’s unpublished decision in Reece v. AES Corp., in which a panel of this
6
court applied in the CAFA-exception context the longstanding view that “allegations of
mere residence may not be equated with citizenship.” 638 F. App’x at 769 (unpublished)
(quotations omitted). Thus, the Reece panel said, such allegations must be accompanied
by “some persuasive substantive evidence (extrinsic to the amended petition) to establish
the [requisite] citizenship of the class members.” Id.
The Eighth Circuit has similarly “read the historical citizenship/residency
distinction into” the CAFA mandatory exception statute and rejected the assertion that
“presumptions alone may transform a challenged allegation of residency into the
establishment of citizenship.” Hargett v. RevClaims, L.L.C., 854 F.3d 962, 966 & n.2
(8th Cir. 2017) (citing Mason, 842 F.3d at 397-99 (Kethledge, J., dissenting); Reece, 638
F. App’x at 769-70; and Mondragon, 736 F.3d at 884).
We agree with the dissent in Mason, this court’s non-precedential decision in
Reece, and the other circuits that reject the applicability of a rebuttable presumption of
citizenship in the context of a CAFA exception invoked based on the mere allegation of
residence. There is a “strong preference that interstate class actions should be heard in a
federal court if properly removed by any defendant.” Dutcher, 840 F.3d at 1190
(quotation omitted). Further, “[a]n individual’s residence is not equivalent to his
domicile and it is domicile that is relevant for determining citizenship.” Siloam Springs
Hotel, L.L.C. v. Century Sur. Co., 781 F.3d 1233, 1238 (10th Cir. 2015); see, e.g.,
Bingham v. Cabot, 3 U.S. (3 Dall.) 382, 383 (1798) (“A citizen of one state may reside
for a term of years in another state, of which he is not a citizen; for, citizenship is clearly
7
not co-extensive with inhabitancy.”).4 Congress no doubt “mean[t] to incorporate the
established meaning of these terms,” NLRB v. Amax Coal Co., 453 U.S. 322, 329
(1981), into the CAFA exceptions premised on “citizenship,” 28 U.S.C. § 1332(d)(4).
See Hargett, 854 F.3d at 966. We therefore turn to the evidence Nichols submitted to
show that two-thirds or more of the proposed plaintiff class members were Oklahoma
citizens.
III
We review for clear error the district court’s factual findings concerning the
applicability of CAFA’s home-state exception. See Mondragon, 736 F.3d at 886; see
also Middleton v. Stephenson, 749 F.3d 1197, 1201 (10th Cir. 2014) (indicating that
domicile and citizenship findings are reviewed for clear error). Under the clear-error
standard, “we may reverse only if the district court’s finding lacks factual support in the
record or if, after reviewing all the evidence, we have a definite and firm conviction that
the district court erred.” Middleton, 749 F.3d at 1201.
Nichols maintains that he provided enough evidence of the putative class
members’ Oklahoma citizenship to require remand. He presented business records
provided by Chesapeake of its royalty owners along with their Oklahoma addresses;
identified class members as being exempt from non-resident withholding tax; selected a
representative sample of class members and obtained citizenship data on those members;
4
Domicile requires both residence in a State and intent to remain there
indefinitely. Middleton v. Stephenson, 749 F.3d 1197, 1200 (10th Cir. 2014).
8
and employed a statistician to draw conclusions about the composition of the class based
on a random sample. Further, he stresses that his evidence was unrebutted.
We acknowledge the significant effort Nichols employed to show that at least two-
thirds of the class members shared Chesapeake’s Oklahoma citizenship. But we note that
the need for this evidence was of Nichols’ own making: he chose to define the class in
terms of residence rather than citizenship. See In re Sprint Nextel Corp., 593 F.3d at 676
(stating that CAFA’s home-state exception would have been satisfied had the plaintiffs
simply limited the class to Kansas citizens because “it doesn’t take any evidence to
establish that Kansas citizens make up at least two-thirds of the members of a class that is
open only to Kansas citizens”). By defining the class in terms of residence, Nichols
saddled himself with an evidentiary burden, one which he sought to meet through
admittedly imperfect evidence.
In particular, Kadane reached his conclusion that two-thirds or more of the class
members are Oklahoma citizens by extrapolating from a flawed sample. As the district
court observed, trusts—which make up nearly 15% of the sample—were not properly
accounted for. Further, the sample included deceased individuals without providing
further identifying citizenship information. And finally, the district court alluded to
information in the skip-trace reports inconsistent with Oklahoma citizenship for some of
the sample’s members. Nichols does not dispute these problems or otherwise explain
how Kadane’s evidentiary extrapolation remains statistically viable.
Given the clear-error standard of review, we must affirm the district court’s
conclusion that Nichols failed to prove at least two-thirds of the proposed plaintiff class
9
members were Oklahoma citizens by a preponderance of the evidence. The district court,
therefore, properly determined that CAFA’s home-state exception to exercising
jurisdiction did not apply.
IV
AFFIRMED.
Entered for the Court
Carlos F. Lucero
Circuit Judge
10