Houck v. State Farm Fire & Cas. Co.

• Decision Date: 18 March 2002
• Docket Number: No. Civ.A. 9:01-3049-23.,Civ.A. 9:01-3049-23.
• Citation: 194 F.Supp.2d 452
• Parties: Jacqueline Z. HOUCK; Richard Perrini; and all others similarly situated, Plaintiffs, v. STATE FARM FIRE AND CASUALTY COMPANY; State Farm Insurance Group; John C. Mallet, individually and in his capacity as a class representative for State Farm Insurance Agents; John Doe, Defendants.
• Court: U.S. District Court — District of South Carolina

194 F.Supp.2d 452

Jacqueline Z. HOUCK; Richard Perrini; and all others similarly situated, Plaintiffs, v. STATE FARM FIRE AND CASUALTY COMPANY; State Farm Insurance Group; John C. Mallet, individually and in his capacity as a class representative for State Farm Insurance Agents; John Doe, Defendants.

No. Civ.A. 9:01-3049-23.

United States District Court, D. South Carolina, Beaufort Division.

March 18, 2002.

George Richardson Wieters, Hilton Head Island, SC, Curtis Lee Coltrane, Gregory M. Alford, Coltrane & Alford, Hilton Head Island, SC, Donald E. Jonas, Cotty & Jonas, Columbia, SC, for Plaintiffs.

Monteith P. Todd, Laura W. Robinson, Sowell, Gray, Stepp & Laffitte, Columbia, SC, for Defendants.

ORDER

DUFFY, District Judge.

This matter is before the court upon Plaintiffs' Motion to Remand. Defendants oppose this motion. For the following reasons Plaintiffs' Motion to Remand is granted.

I. BACKGROUND

Plaintiffs are homeowners who purchased flood insurance from Defendants. Plaintiffs, individually and on the behalf of those similarly situated, allege that Defendants improperly steered them to purchase flood insurance coverage which was more expensive and in excess of their discernable needs. Plaintiffs originally filed this action in the Beaufort County Court of Common Pleas on June 20, 2001. Defendants removed this case on July 20, 2001 alleging federal question jurisdiction pursuant to 28 U.S.C. § 1331. Plaintiff timely filed its Motion to Remand on August 16, 2001.

The flood insurance purchased by Plaintiffs is part of the National Flood Insurance Program (NFIP). Congress established the NFIP in 1968 pursuant to the National Flood Insurance Act (NFIA), 42 U.S.C. § 4001 et seq. The NFIP is federally subsidized and currently administered by the Federal Emergency Management Agency (FEMA). 42 U.S.C. §§ 4001-4129. In 1983, FEMA promulgated regulations that enabled the agency to use private insurers, called Write-Your-Own insurance companies (WYO), as intermediaries in providing flood insurance. See 44 C.F.R § 61.13(f).¹ The flood insurance policies issued under the NFIP are called Standard Flood Insurance Policies (SFIPs).² FEMA regulations exclusively establish the terms of the SFIP as well as the rate structures and premium costs. WYO companies market, issue, and handle claims adjustment of these SFIPs.³

WYO companies issue SFIPs in their own names. 44 C.F.R. § 61.13(f), 62.23(a). These companies collect premiums in segregated accounts from which they pay claims and make necessary refunds under those policies. 44 C.F.R. § 62, App. A, Arts. II(E), III(D), and III(E). After deducting the companies' fees and administrative costs, premiums collected from policy holders are deposited in the National Flood Insurance Fund in the U.S. Treasury. 42 U.S.C. § 4017(d). When the WYO companies lack sufficient funds in their segregated accounts, they draw on FEMA letters of credit from the U.S. Treasury to pay claims and make refunds. While WYO companies defend against claims, FEMA reimburses them for certain defense costs, 44 C.F.R. § 62.23(i)(6),⁴ because WYO companies are fiscal agents of the United States, 42 U.S.C. § 4071(a)(1).⁵

Congress established the NFIP "among other things, to limit the damage caused by flood disasters through prevention and protective measures, spread the risk of flood damage among many private insurers and the federal government, and make flood insurance `available on reasonable terms and conditions' to those in need of it." Van Holt v. Liberty Mut. Fire Ins. Co., 163 F.3d 161, 165 (3d Cir.1998) (quoting 42 U.S.C. § 4001(a)). The NFIP was particularly necessary given the unavailability of flood insurance from private insurance companies unable to provide flood insurance on an economically feasible basis. 42 U.S.C. §§ 4001 & 4002. To encourage private insurers to provide flood insurance, the federal government provides a number of incentives already noted above. First, the government bears the ultimate responsibility for financing. 44 C.F.R. § 62.23(f); 44 C.F.R.Pt. 62, App. A, arts II(E), IV(A), VII(A). Second, the government provides commissions on all benefit payments made by WYOs. 44 C.F.R.Pt. 62, App. A, art. III(C)(1).

II. STANDARD

Removal statutes must be construed strictly against removal. Mulcahey v. Columbia Organic Chem. Co., Inc., 29 F.3d 148, 151 (4th Cir.1994). The party seeking removal bears the burden of establishing the right to removal, including compliance with the jurisdictional requisites. Id. "If federal jurisdiction is doubtful, a remand is necessary." Handyman Network, Inc. v. Westinghouse Savannah River Co., 868 F.Supp. 151, 153 (D.S.C. 1994) (citing Mulcahey v. Columbia Organic Chemicals Co., Inc., 29 F.3d 148, 151 (4th Cir.1994)); see also Whitman v. Raley's, Inc., 886 F.2d 1177, 1180 (9th Cir. 1989). Removal jurisdiction is determined on the basis of the state court complaint at the time of removal, and the removing party bears the burden of establishing the existence of federal jurisdiction. Woodward v. Newcourt Comm. Fin. Corp., 60 F.Supp.2d 530, 531 (D.S.C.1999). It is uncontested that this case involves non-diverse parties and that the court, therefore, does not have diversity jurisdiction. See 28 U.S.C. § 1332. Thus, the only question is whether there is subject matter jurisdiction pursuant to 28 U.S.C. § 1331.⁶

In order for a defendant to remove a case filed in state court, there must exist original federal jurisdiction. 28 U.S.C. § 1441(a). Defendants contend that this court has original federal question jurisdiction of this action under 28 U.S.C. § 1331. Section 1331 provides: "district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States." 28 U.S.C. § 1331. The meaning of the phrase "arising under" is not for want of Supreme Court precedent regarding its meaning and effect. Most important, "a cause of action arises under federal law only when the plaintiff's well-pleaded complaint raises issues of federal law." Metropolitan Life Ins. Co. v. Taylor, 481 U.S. 58, 63, 107 S.Ct. 1542, 95 L.Ed.2d 55 (1987); see Louisville & Nashville Railroad v. Mottley, 211 U.S. 149, 29 S.Ct. 42, 53 L.Ed. 126 (1908).

Even when no federal claim appears on the face of the complaint, the court may still uphold removal if it appears that the complaint has been "artfully pled" in order to avoid reference to any federal law. See Franchise Tax Bd. of State of Cal. v. Construction Laborers Vacation Trust for Southern California, 463 U.S. 1, 22, 103 S.Ct. 2841, 77 L.Ed.2d 420 (1983). Specifically, if Plaintiffs have pled state law claims that involve issues either completely preempted by federal law, or that necessarily implicate a substantial question of federal law, then the court may assume federal-question jurisdiction of the case. Furthermore, a defendant may not remove a case on the basis of an anticipated or even inevitable federal defense, but instead must show that a federal right is an essential element of the plaintiff's cause of action. Gully v. First Nat'l Bank, 299 U.S. 109, 57 S.Ct. 96, 81 L.Ed. 70 (1936); see also Merrell Dow Pharmaceuticals Inc. v. Thompson, 478 U.S. 804, 808, 106 S.Ct. 3229, 92 L.Ed.2d 650 (1986) ("A defense that raises a federal question is inadequate to confer federal jurisdiction.").

III. FEDERAL QUESTION JURISDICTION

In the present case, Plaintiffs have pled six state-law causes of action: (1) breach of contract; (2) breach of implied warranty of good faith and fair dealing; (3) negligence; (4) negligent misrepresentation; (5) fraud; and (6) civil conspiracy. Nevertheless, Defendants oppose remand contending that this controversy involves a federal question pursuant to the National Flood Insurance Act of 1968 (NFIA) as amended, 42 U.S.C. Section 4001 et seq. and its attendant rules and regulations. However, Defendants do not claim Plaintiffs' state law claims are completely preempted.⁷ Instead, Defendants argue that substantial federal questions are evident from the face of the Plaintiffs' Complaint and significant federal interests are at stake.

The Fourth Circuit Court of Appeals has held that in certain circumstances a federal question may exist in cases where a uniquely federal interest is "so important that the `federal common law' supplants state law either partially or entirely regardless of Congress' intent to preempt the area involved." Caudill v. Blue Cross and Blue Shield of North Carolina, 999 F.2d 74, 77 (4th Cir.1993) (citing Boyle v. United Tech. Corp., 487 U.S. 500, 504, 108 S.Ct. 2510, 101 L.Ed.2d 442 (1988)).<sup>8</sup> The Fourth Circuit relied on the two-part test for determining the applicability of federal common law set forth in Boyle. "First, the matter must involve a uniquely federal interest." Id. at 78 (citing Boyle, 487 U.S. at 507, 108 S.Ct. 2510).<sup>9</sup> However, "a significant federal interest alone ... will not allow federal common law to displace state law." Id. Federal common law displaces state law only when a "significant conflict" exists "between the federal interest or policy and the effect of the state law," or the state law as applied frustrates "`specific policy objectives' of federal legislation.'" Id. (quoting Boyle, 487 U.S. at 507, 108 S.Ct. 2510) (citations omitted).¹⁰

A. Significant Federal Interests

Defendants set forth several issues they characterize as substantial, federal issues sufficient to establish jurisdiction. Defendants first contend that the legal duties governing the conduct of insurance agents and WYO carriers in the sale of NFIP policies are established by various federal rules and regulations. The Arrangement between the WYO companies and FEMA states that WYO companies "shall issue policies under the regulations prescribed by the Administrator in accordance with the Act." 44 C.F.R. 62, App. A, Art. II.D.2. The Arrangement further provides that WYO companies "shall market flood insurance policies in a...