State of Hawaii ex rel. Atty. Gen. v. Fema

• Decision Date: 26 June 2002
• Docket Number: No. 00-15895.,00-15895.
• Citation: 294 F.3d 1152
• Parties: STATE OF HAWAII, by and through Its ATTORNEY GENERAL, Plaintiff-Appellant, v. FEDERAL EMERGENCY MANAGEMENT AGENCY; Joe M. Allbaugh,<SMALL><SUP>*</SUP></SMALL> Director, FEMA; Lacy E. Suiter, Executive Associate Director, Response and Recovery Directorate, FEMA; Karen Armes, Regional Director, Region IX, FEMA;<SMALL><SUP>**</SUP></SMALL> Patricia A. English, Acting Chief Financial Officer, FEMA;<SMALL><SUP>***</SUP></SMALL> George J. Opfer, Inspector General, FEMA, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

294 F.3d 1152

STATE OF HAWAII, by and through Its ATTORNEY GENERAL, Plaintiff-Appellant, v. FEDERAL EMERGENCY MANAGEMENT AGENCY; Joe M. Allbaugh,^* Director, FEMA; Lacy E. Suiter, Executive Associate Director, Response and Recovery Directorate, FEMA; Karen Armes, Regional Director, Region IX, FEMA;^** Patricia A. English, Acting Chief Financial Officer, FEMA;^*** George J. Opfer, Inspector General, FEMA, Defendants-Appellees.

No. 00-15895.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted November 5, 2001.

Filed June 26, 2002.

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Dorothy D. Sellers, with whom Michael S. Vincent was on the briefs, Office of the Attorney General, State of Hawaii, Honolulu, HI, for plaintiff-appellant.

Caroline Lewis Wolverton, United States Department of Justice, Civil Division, Washington, DC, for defendants-appellees.

Appeal from the United States District Court for the District of Hawaii; Susan Oki Mollway, District Judge, Presiding. D.C. No. CV-99-00490-SOM.

Before: THOMPSON, O'SCANNLAIN and BERZON, Circuit Judges.

BERZON, Circuit Judge:

Hurricane Iniki stormed over the Hawaiian island of Kauai a decade ago, but a dispute it left behind continues. The largest disaster ever to hit the state of Hawaii ("Hawaii"), the 1992 hurricane caused an estimated $2.6 billion in damage.

The Federal Emergency Management Agency ("FEMA" or "the Agency"), the agency of the federal government that provides dollars to communities afflicted by floods, earthquakes, fires, and hurricanes, provided substantial assistance to the state. Hawaii's insurers, in a settlement with the state, did so as well. For the most part, the federal Agency and the private insurance companies distributed their dollars to different projects. But in the case of the repair of sixteen state facilities, including institutions such as the Hanalei Elementary School and the Sam Mahelona Hospital ("the disputed repairs"), the aid overlapped.

Under federal disaster relief law, the federal government is essentially a last resort provider of disaster relief. Disaster victims cannot retain FEMA funds when another party provides the same relief. Pursuant to the preclusion of duplicative relief, Hawaii reimbursed FEMA for all the insurance proceeds from its settlement that it allocated to the damage to the sixteen facilities.

FEMA, however, spent more on the disputed repairs than Hawaii had allocated from its settlement for them. FEMA does not impugn the propriety of Hawaii's decision to enter into an overall settlement with its insurers or the terms of the settlement. Nonetheless, FEMA is not satisfied with the amount of Hawaii's reimbursement. Under Hawaii's insurance policies, FEMA maintains, the state could have received the full amount that FEMA spent on the disputed repairs. Federal law requires a disaster victim to reimburse FEMA for all duplicative assistance "available" to it. 42 U.S.C. § 5155(c).¹ Additional insurance benefits that the state could have obtained had it not settled for less — reasonable though the decision to settle was — were "available," FEMA argues; therefore an equivalent amount of money must be paid to the Agency.

The central question in this case, consequently, is whether a recipient of FEMA assistance must repay FEMA for funds above and beyond the amount it received as the result of a reasonable settlement with an alternative source of relief funds.

I. Background

The day after Hurricane Iniki devastated the Hawaiian island Kauai in 1992, former President George Bush declared the state a disaster area and authorized FEMA to provide disaster relief. As part of its response, FEMA directed the United States Army Corps of Engineers ("ACOE") to provide assistance. The ACOE in turn contracted with area construction companies to make the disputed repairs, completing them in early 1993. FEMA eventually paid the ACOE $12.1 million² for the disputed repairs.³

When Iniki struck, Hawaii had several insurance policies. The state's primary insurance policy had a $10 million per occurrence limit and a $250,000 deductible. Its excess coverage policy had a $40 million per occurrence limit. These two policies were subject to the same terms and conditions.

In May 1994, Hawaii settled with these two insurers for $42.7 million. Dubbed a "global settlement," the agreements encompassed all of the damaged property covered by the insurers, including the sixteen facilities at the fulcrum of this dispute. The amount of the settlement was based on surveys conducted by two independent firms of insurance adjusters. The survey reports quantified every item of damage and estimated the cost of repair for each. Of the total settlement amount, Hawaii attributed $7.4 million to work performed by the ACOE at the sixteen sites.⁴ As noted above, FEMA ultimately reimbursed the ACOE $12.1 million for these disputed repairs. The difference, $4.7 million, is the amount in dispute in this litigation.

In the settlement negotiations, Hawaii's private insurers suggested that Hawaii select between two basic approaches for determining the amount it would receive: (1) a cash out or loss estimate basis or (2) an actual replacement cost basis. To assist state officials in making a decision that would "provide the best result in terms of restoring the buildings in the most efficient and timely manner," the Hawaii comptroller described the two options as follows:

The advantage of cashing-out is that there is no accountability to the insurer. The disadvantage is that there is no recourse against the insurer, such as when construction bids exceed the loss estimates. The advantage of settling on [sic] actual cost basis is that the final replacement costs will be paid by insurance. The disadvantage is the slow pace that often result [sic] when the insurer is involved with the development of the scope of the work, overseeing the bidding process, and resolving insurance, cost and construction issues, such as when the replacement or repair is modified from the original building.

In a settlement that FEMA has never challenged as unreasonable, Hawaii decided to "cash-out," for $42.7 million.⁵

Although invited, FEMA chose not to participate in the settlement negotiations between Hawaii and its insurers, because "it had no role to play." Nor did FEMA provide detailed cost information for the disputed repairs to either Hawaii or its insurers. The ACOE continued to bill FEMA for the disputed repairs after Hawaii settled with its insurers. Even today, the available ACOE billing statements do not include detailed breakdowns of the actual costs of the repairs. As FEMA held in its final administrative decision, "detailed breakouts of actual costs for the majority" of the ACOE's disputed repairs "do not exist."

Eight months after Hawaii and its insurers settled, FEMA informed Hawaii that its Office of Inspector General was conducting an audit of the insurance reimbursement. The Inspector General concluded that it was not possible to determine how much of the $42.7 million insurance settlement that Hawaii received applied to the repairs done by the ACOE. The audit report nonetheless concluded that its payment of $12.1 million to the ACOE constituted a duplicate benefit for Hawaii because the buildings the ACOE repaired were fully insured by Hawaii, and Hawaii received an insurance settlement to cover their repair costs. The report's recommendation was that FEMA seek reimbursement from Hawaii under § 5155(c).

Hawaii thereupon appealed, first to the FEMA acting regional director, who denied the appeal,⁶ and then to the Executive Associate Director of FEMA's Response and Recovery Directorate. The Associate Director did not immediately decide the appeal, as he was of the view that an earlier FEMA analysis was not conducted according to a statistically valid method. (That analysis had considered whether the work conducted by the ACOE was covered by Hawaii's insurance.) Instead, the Associate Director first contacted FEMA's Western Territorial Closeout Team (Closeout Team) and requested that it perform a more valid analysis.

The Closeout Team's subsequent report to the Associate Director stated that it could not fully conduct the requested study because, as the Associate Director stated in his final decision, "[t]he information available from the [ACOE] was not sufficient to perform the desired comparison of insurance estimates and [ACOE] work and costs." The same report also stated that FEMA did not have a figure that reflected better than Hawaii's $7.4 million estimate the amount that Hawaii received from its insurance settlement for the ACOE repairs in particular. Concluding that "[w]ithout a defensible basis for assigning a greater portion of the insurance adjustment to [the ACOE] work, it is not reasonable for FEMA to do so," the report recommended that FEMA should seek only $7.4 million from Hawaii.

The Associate Director did not heed the recommendations of the Closeout Team. Instead, he denied Hawaii's appeal. The Associate Director's decision — FEMA's last — pointed out that Hawaii's insurers had presented the state with the option to settle for actual damage repair costs. The final decision went on to determine that because the $12.1 million total cost of the ACOE repairs was not greater than Hawaii's $42.7 million insurance settlement "we must assume that the settlement was adequate for all work on the buildings in question."

Hawaii next filed suit in federal district court for injunctive and declaratory relief. FEMA moved for summary judgment. The district court issued two decisions, denying FEMA's motion without prejudice in the first and granting it in the second.

In its first opinion, the district court dismissed most of Hawaii's arguments; Hawaii does not appeal these rulings. Hawaii I, 78 F.Supp.2d 1111. As to the merits of the duplicative benefits issue, the district court held that § 5155(c) required Hawaii to reimburse not only the...