Shady Grove Orthopedic Associates v. Allstate Ins

• Decision Date: 19 November 2008
• Docket Number: Docket No. 07-0141-cv.
• Citation: 549 F.3d 137
• Parties: SHADY GROVE ORTHOPEDIC ASSOCIATES, P.A., on behalf of itself and all others similarly situated, Plaintiff-Appellant, Sonia E. Galvez, Plaintiff, v. ALLSTATE INSURANCE COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Second Circuit

549 F.3d 137

SHADY GROVE ORTHOPEDIC ASSOCIATES, P.A., on behalf of itself and all others similarly situated, Plaintiff-Appellant, Sonia E. Galvez, Plaintiff, v. ALLSTATE INSURANCE COMPANY, Defendant-Appellee.

Docket No. 07-0141-cv.

United States Court of Appeals, Second Circuit.

Argued: September 10, 2008.

Decided: November 19, 2008.

John S. Spadaro, John Sheehan Spadaro, LLC, Hockessin, DE, for Plaintiff-Appellant.

Andrew T. Hahn, Sr., Seyfarth Shaw LLP, New York, NY, for Defendant-Appellee.

Before: CABRANES, POOLER, KATZMANN, Circuit Judges.

Pooler, Circuit Judge:

In this appeal, we address whether Section 901(b) of the New York Civil Practice Law and Rules ("CPLR") — which prohibits a lawsuit seeking a statutory penalty from being brought as a class action — may be applied in a federal court sitting in diversity jurisdiction and adjudicating claims under New York law. Plaintiff-appellant Shady Grove Orthopedic Associates brought a class action for statutory interest penalties under Section 5106(a) of New York Insurance Law ("N.Y. Ins. Law") against defendant-appellee Allstate Insurance Company. In an opinion and order dated December 15, 2006, the district court (Nina Gershon, J.) granted Allstate's motion to dismiss on the ground that Shady Grove's claim is barred by CPLR 901(b). Shady Grove now appeals that ruling.

BACKGROUND

Shady Grove's complaint alleged that Allstate failed to pay statutory interest penalties on overdue payments of insurance benefits owed to plaintiffs under no-fault automobile insurance policies issued by Allstate.¹ Shady Grove did not seek recovery of the insurance benefits themselves, which it concedes were eventually paid by Allstate. Rather, Shady Grove alleged that Allstate failed to make the payments of insurance benefits within the time frame prescribed by Section 5106(a) of N.Y. Ins. Law and Part 65-3 of Title 11 of the New York Compilation of Codes, Rules and Regulations, rendering the benefits overdue and thus incurring the statutory interest penalty of two percent per month.² Shady Grove further alleged that Allstate (1) routinely fails to pay covered claims for first-party no-fault benefits within the statutorily mandated 30-day time period; (2) routinely ignores its obligation to pay the statutory interest owed in such cases; and (3) routinely and falsely claims to have never received proof of the loss from the insured, so as to avoid triggering the statutory time limits.

Shady Grove invoked the district court's diversity jurisdiction under 28 U.S.C. § 1332(d)(2)(A), which provides that "[t]he district courts shall have original jurisdiction of any civil action in which the matter in controversy exceeds the sum or value of $5,000,000, exclusive of interest and costs, and is a class action in which . . . any member of a class of plaintiffs is a citizen of a State different from any defendant . . . ." Allstate is an Illinois corporation; Shady Grove is a Maryland corporation. The relevant automobile insurance policy is governed by New York law. Shady Grove sought damages in excess of $5,000,000 on behalf of a putative class of all individuals to whom Allstate owes interest under N.Y. Ins. Law § 5106(a). See Shady Grove Orthopedic Assocs., P.A., 466 F.Supp.2d at 469. Shady Grove acknowledged that its individual claim for approximately $500 in damages, which was based on interest on services rendered to Galvez, would fail to meet the monetary requirement for diversity jurisdiction. Id.

Allstate moved to dismiss based on CPLR 901(b), which provides:

Unless a statute creating or imposing a penalty, or a minimum measure of recovery specifically authorizes the recovery thereof in a class action, an action to recover a penalty, or minimum measure of recovery created or imposed by statute may not be maintained as a class action.

Therefore, Allstate argued, Shady Grove could not bring its action for a statutory interest penalty under N.Y. Ins. Law § 5106(a) as a class action, and the district court lacked diversity jurisdiction. Shady Grove argued that CPLR 901(b) is not applicable to class actions brought in federal court because it is a procedural rule in conflict with Rule 23 of the Federal Rules of Civil Procedure. In a careful and thorough opinion, Judge Gershon rejected this argument, reasoning that:

Whereas this Court is bound by Rule 23 in this action, the strictures of § 901(b) do not contravene any federal rule. This situation does not warrant an invocation of the Supremacy Clause or a discussion of the overlapping scope of § 901 and Rule 23. It would be patently unfair to allow a plaintiff an attempt at recovery in federal court for a state law claim that would be barred in state court.

Shady Grove Orthopedic Assocs., P.A., 466 F.Supp.2d at 472 (quoting Dornberger v. Metro. Life Ins. Co., 182 F.R.D. 72, 84 (S.D.N.Y.1998) (alteration marks omitted)).

The district court also rejected Shady Grove's argument that N.Y. Ins. Law § 5106(a) falls within the exception clause of CPLR 901(b), which allows class action suits where "a statute creating or imposing a penalty, or a minimum measure of recovery specifically authorizes the recovery thereof in a class action . . ." Id. at 472, 474-75.

Shady Grove now appeals the district court's decision. Shady Grove argues that (1) under the rule of Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), a federal court should not apply a state procedural rule that would limit the use of a procedural device — here, the class action — that is otherwise available under the Federal Rules of Civil Procedure, and (2) the district court erred in failing to find that the exception clause of CPLR 901(b) was triggered.³

DISCUSSION

"We review the denial of a motion to dismiss the complaint de novo, accepting the truth of each factual allegation it contains." Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital, Inc., 531 F.3d 190, 194 (2d Cir.2008).

I. Erie Doctrine

"Under the Erie doctrine, federal courts sitting in diversity apply state substantive law and federal procedural law." Gasperini v. Ctr. for Humanities, Inc., 518 U.S. 415, 427, 116 S.Ct. 2211, 135 L.Ed.2d 659 (1996); accord Allianz Ins. Co. v. Lerner, 416 F.3d 109, 118 (2d Cir.2005). "[T]he Erie doctrine applies, whatever the ground for federal jurisdiction, to any issue or claim which has its source in state law." In re Gaston & Snow, 243 F.3d 599, 607 (2d Cir.2001) (quotation marks omitted).

The Supreme Court has observed that "[c]lassification of a law as `substantive' or `procedural' for Erie purposes is sometimes a challenging endeavor." Gasperini, 518 U.S. at 427, 116 S.Ct. 2211. However, if a state rule is not compatible with a Federal Rule of Civil Procedure, the "question is usually unproblematic." Id. at 427 n. 7, 116 S.Ct. 2211. The Federal Rule controls under the Supremacy Clause, so long as that Federal Rule "is consonant with the Rules Enabling Act, 28 U.S.C. § 2072, and the Constitution. . . ." Id. (citing Hanna v. Plumer, 380 U.S. 460, 469-74, 85 S.Ct. 1136, 14 L.Ed.2d 8 (1965); Burlington N. R.R. Co. v. Woods, 480 U.S. 1, 4-5, 107 S.Ct. 967, 94 L.Ed.2d 1 (1987)).

In analyzing whether a state rule conflicts with a Federal Rule of Civil Procedure, we must "determine whether, when fairly construed, the scope of [the Federal Rule] is `sufficiently broad' to cause a `direct collision' with the state law or, implicitly, to `control the issue' before the court, thereby leaving no room for the operation of that law." Burlington N. R.R. Co., 480 U.S. at 4-5, 107 S.Ct. 967 (quoting Walker v. Armco Steel Corp., 446 U.S. 740, 749-50 & n. 9, 100 S.Ct. 1978, 64 L.Ed.2d 659 (1980)). In Walker, the Court cautioned: "[t]his is not to suggest that the Federal Rules of Civil Procedure are to be narrowly construed in order to avoid a `direct collision' with state law. The Federal Rules should be given their plain meaning." 446 U.S. at 750 n. 9, 100 S.Ct. 1978. Nonetheless, "[f]ederal courts have interpreted the Federal Rules . . . with sensitivity to important state interests and regulatory policies." Gasperini, 518 U.S. at 427 n. 7, 116 S.Ct. 2211 (citing Walker, 446 U.S. at 750-752, 100 S.Ct. 1978 and S.A. Healy Co. v. Milwaukee Metro. Sewerage Dist., 60 F.3d 305, 310-312 (7th Cir. 1995)).

If the state rule does not directly collide with the Federal Rule, the inquiry becomes whether the choice of rule would be "outcome affective" — in other words, "[w]ould `application of the [standard] . . . have so important an effect upon the fortunes of one or both of the litigants that failure to [apply] it would [unfairly discriminate against citizens of the forum State, or] be likely to cause a plaintiff to choose the federal court'?" Gasperini, 518 U.S. at 428, 116 S.Ct. 2211 (quoting Hanna, 380 U.S. at 468 n. 9, 85 S.Ct. 1136) (alterations in original).⁴ Courts must analyze this question in light of the "twin aims" of Erie. Id. at 430, 116 S.Ct. 2211. "The rationale of [Erie] was, first, that federal courts should obtain results substantially similar to those reached by state courts considering the same cause of action, and, second, that federal courts should avoid application of federal law if that application would significantly encourage forum shopping by prospective out-of-state litigants." Morse v. Elmira Country Club, 752 F.2d 35, 37 (2d Cir.1984) (citing Walker, 446 U.S. at 747, 100 S.Ct. 1978; Hanna, 380 U.S. at 467, 85 S.Ct. 1136).

However, the test of whether application of a rule is outcome affective "was never intended to serve as a talisman." Hanna, 380 U.S. at 466-67, 85 S.Ct. 1136 (quoting Byrd v. Blue Ridge Rural Elec. Coop., Inc., 356 U.S. 525, 537, 78 S.Ct. 893, 2 L.Ed.2d 953 (1958)). Federal courts will not apply a state rule if it would threaten "`[a]n essential characteristic of [the federal court] system.'" Gasperini, 518 U.S. at 431, 116 S.Ct. 2211 (quoting Byrd, 356 U.S. at 537, 78 S.Ct. 893) (alterations in...