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Crop Insurance

Sugar Beet Growers Sue Crop Insurers

Harrison M. Pittman
Staff Attorney

In an action brought by several sugar beet growers against various crop insurers for failure to pay the growers' claims for frost damage, the United States District Court for the District of Minnesota ruled that the growers' contract claims should be aggregated with their fraud claims for purposes of calculating the amount in controversy. Agre v. Rain & Hail LLC, 196 F.Supp.2d 905 (D. Minn. 2002)). The court also ruled that the Federal Crop Insurance Act ("FCIA"), 7 U.S.C. Secs. 1501-1515, did not preempt all of the growers' state law claims and that the crop insurers' naming of the Federal Crop Insurance Corporation ("FCIC") as a third party defendant did not justify removal of the case to federal court. See id. at 910, 913.

The plaintiffs in this action were Minnesota sugar beet growers and a sugar beet cooperative who suffered substantial financial losses in October of 2000 when their crops, or members' crops, were severely damaged or destroyed by frost. See id. at 907. When the plaintiffs discovered the destruction, they filed claims with their respective defendant-insurers. See id. The defendants "neither acted upon or paid" the claims. Id.

The plaintiffs filed separate actions in Minnesota state court alleging contract damages "in excess of $50,000.00 including direct, consequential, and incidental damages for losses incurred following the freeze." Id. Each plaintiff also requested damages, attorneys fees, and costs pursuant to the Minnesota Prevention of Consumer Fraud Act, Minn. Stat. Ann. Secs. 325F.67-325F.70 (West 1995). See id. The parties subsequently agreed to consolidate their separate actions for purposes of discovery and pretrial motions because the cases involved substantially the same legal and factual issues. See id. at 907, n.1. The defendants removed the case to federal district court in September of 2001. See id. at 907.

The plaintiffs argued that the case should be remanded because the district court did not have subject matter jurisdiction over their claims. See id. The defendants argued that the case should not be remanded because the district court had diversity jurisdiction under 28 U.S.C. Sec. 1332, federal question jurisdiction under 28 U.S.C. Sec. 1331, and federal party removal jurisdiction pursuant to 29 U.S.C. Sec. 1442(a). See id.

The district court noted that federal courts are courts of limited jurisdiction and that subject matter jurisdiction "acts as an absolute stricture" on federal courts, although defects in personal jurisdiction can be waived by the parties. Id. (citing In re Prairie Island Dakota Sioux, 21 F.3d 302, 304-05 (8th Cir. 1994)). The court also noted that the removal statute was intended to limit removal jurisdiction, "therefore, the court resolves any doubt against removal jurisdiction." Id. at 907-08 (citing American Fire & Cas. Co. v. Finn, 341 U.S. 6 (1951)). In addition, the court explained that diversity jurisdiction and federal question jurisdiction are the bases of subject matter jurisdiction. See id. at 907. Finally, the court stated that the "non-moving party bears the burden of proving that the complaint establishes the requisite amount in controversy by a preponderance of the evidence" whenever a motion to remand is contested. Id. at 908.

The court first examined whether it could assert diversity jurisdiction over the parties' dispute. See id. 28 U.S.C. Sec. 1332 requires that in order to establish diversity jurisdiction, the litigating parties must be citizens of different states and the amount in controversy must be greater than $75,000.00. See id.

The parties essentially agreed that the diversity of citizenship requirement set forth in section 1332 was met, but disagreed strongly as to whether the amount in controversy requirement had been satisfied for each plaintiff. See id. The plaintiffs argued that the amount in controversy requirement was not satisfied because they had not claimed damages in excess of $75,000.00. See id. The defendants argued that although the plaintiffs' complaint alleged damages in excess of $50,000.00-- an amount less than the $75,000.00 requirement-- "in reality, each plaintiff actually [sought] a sum in excess of $75,000.00." Id. More specifically, the defendants argued that the court should divide the $77,500,000.00 amount claimed by the Southern Minnesota Beet Sugar Cooperative by the total number of the cooperative's members. See id. The defendants contended that under this scenario the $75,000.00 requirement would be more than satisfied because the average per member loss would actually be $140,000.00. See id.

The district court rejected this argument stating that it "purposely misconstru[ed] the amount of damages each individual plaintiff pleaded by improperly consolidating all of their claims." Id. The court also pointed out that some of the plaintiffs suffered damages much lower than $75,000.00. See id. The district court concluded that "the defendant's aggregated-sum-divided-by-the-number-of-plaintiffs theory does not establish, by a preponderance of the evidence, that each individual plaintiff's insurable contract losses were in excess of $75,000.00." Id.

The court also rejected the defendants' argument that "even if some of the individual claimants seek less than $75,000.00, the [district court] has supplemental jurisdiction over the less-than-$75,000.00 claims" pursuant to 28 U.S.C. Sec. 1367(a). Id. The court ruled that "it is clear that each individual plaintiff must meet the amount in controversy requirement in order to establish diversity jurisdiction." Id. at 908- 09. The court relied heavily on the United States Supreme Court decision in Zahn v. International Paper Co., 414 U.S. 291, 296 (1973) that "explicitly held that each member of a diversity-based class action must satisfy the amount in controversy." Id. at 908.

The district court also rejected the defendants' argument that the court should maintain jurisdiction over the claims that satisfied the $75,000.00 requirement and remand those claims that were less than $75,000.00. See id. at 909. The court recognized that although it had the authority to sever claims which were less than $75,000.00, it could only do so in class action cases. See id. (citing Zahn, 414 U.S. at 295). The court added that "[a] court lacks this power in cases which simply involve a large number of individual as opposed to class action joined parties." Id. (citing Crenshaw v. Great Cent. Ins. Co., 482 F.2d 1255, 1260 (8th Cir. 1973)).

The court agreed with the defendants' argument that "the claims, fairly read, assert claims in excess of $75,000.00," because "each plaintiff seeks over $50,000.00 in contract damages, and makes an additional demand for $50,000.00 in statutory fraud damages, attorney's fees and costs." Id. The court stated that when an action is brought in federal court under diversity jurisdiction, the court "aggregates fraud and contract claims" when determining the amount in controversy. Id. (citing McCall v. UNUM Life Ins. Co. of America, 2001 WL 1388013, 2001 U.S. Dist. LEXIS 18132, *9-10 (N.D. Tx. Nov. 6, 2001) (aggregating claims sounding in tort) and citing Lynch v. Porter, 446 F.2d 225, 228 (8th Cir. 1971) (allowing plaintiffs to aggregate claims in order to meet the amount in controversy requirement)). The plaintiffs responded by claiming that removal was improper because their claim brought under the Minnesota Consumer Fraud Act only added attorneys' fees and costs "to what [was] otherwise an alternative contract remedy." Id. The court disagreed, finding that "this claim actually sounded in tort." Id.

The court noted that the Minnesota Supreme Court previously recognized the Minnesota Consumer Fraud Act "as an alternative to common law fraud, and as a tort cause of action." Id. at 910 (citing Group Health Plan, Inc. v. Philip Morris Inc., 621 N.W.2d 2, 7, 13-14 (2001) and State by Humphrey v. Alpine Air Prods., Inc., 500 N.W.2d 788, 790 (Minn. 1993)). The court also stated that "[t]he statutory language, applying as it does to the sale of merchandise, further distinguishes the cause of action from the plaintiffs contract claims." Id. The court concluded that the "[p]laintiffs' tort claims under the Fraud Act are distinct from their contract claims, because they result from defendants' allegedly fraudulent techniques and behavior. In asking for both contract and tort relief, plaintiffs have pleaded damages in an amount in excess of $75,000.00, thereby meeting the requirements of diversity jurisdiction." Id.

The district court next examined the defendants' contention that it could properly exercise federal question jurisdiction over the plaintiffs' state law claims (with respect to two of the cases) pursuant to 28 U.S.C. Sec. 1331. See id. More specifically, the defendants argued that the district court could assert federal question jurisdiction over the plaintiffs' state law claims "under two distinct theories complete preemption and substantial federal question." Id.

With respect to complete preemption, the defendants asserted that the Federal Crop Insurance Act, 7 U.S.C. Secs. 1501-1515, and the regulations enacted to implement the FCIA, operated to completely preempt the plaintiffs' state law claims. See id. The defendants argued that "when the regulations standardized the resolution of crop insurance disputes, they simultaneously compelled exclusive federal jurisdiction." Id.

The court noted that federal question jurisdiction can be established when an action arises "'under the Constitution, laws, or treaties of the United States.'" Id. (quoting 28 U.S.C. Sec. 1331). The court also noted that federal question jurisdiction is analyzed under the well-pleaded complaint rule. See id. The court explained that the well-pleaded complaint rule "'makes the plaintiff the master of the claim; he or she may avoid federal jurisdiction by exclusive reliance on state law.'" Id. (quoting Caterpillar Inc. v. Williams, 482 U.S. 386, 392 (1987)). The court also stated that even though a plaintiff's complaint on its face may only assert state law claims, the case may still be properly removed to federal court under the doctrine of "complete preemption." See id. at 910 (citing Metropolitan Life Ins. Co. v. Taylor, 481 U.S. 58, 63-64 (1987)).

The court noted that when determining if there has been complete preemption, the Eighth Circuit "generally considers whether the supposedly-preempting statute manifests a clear congressional intent to displace all state law claims." Id. (citing Magee v. Exxon Corp., 135 F.3d 599, 601-02 (8th Cir. 1998) (finding no indication that Congress intended to create exclusive federal question jurisdiction when enacting or amending FCIA)). The court added that "[a]bsent clear direction from Congress, the Eighth Circuit declines to find the requisite 'extraordinary preemptive power.'" Id. (citing Magee, 135 F.3d at 543).

The district court thus rejected the defendants' argument, stating that "[t]he simple fact that Congress has established an ordered regulatory scheme is insufficient to preempt all contract claims involving crop insurance." Id. (citing Marcus v. AT&T Corp., 138 F.3d 46, 54 (2d Cir. 1998) (observing that the complete preemption doctrine applies only where Congress has clearly manifested an intent to disallow state law claims in a particular field)). The court also reasoned that the language of 7 C.F.R. Sec. 400.352(a) contradicted the defendants' complete preemption argument because it indicated Congress' willingness to allow state proceedings. See id. Section 400.352(a) provides that "'[n]othing herein is intended to preclude any action on the part of any authorized . . . state court or any other authorized entity concerning . . . the regulations, any contract or agreement authorized by the Federal Crop Insurance Act or by regulations or procedures issued by the Corporation.'" Id. (quoting 7 C.F.R. Sec 400.352(a)). The court added that "[a]nother section of the regulations, entitled 'state preemption,' more explicitly expresses Congress' intention to avoid preemption, specifically calling for proceedings in any 'court of competent jurisdiction, 7 C.F.R. Sec. 400.176, which certainly does not preclude consideration of state courts.'" Id.

With respect to their substantial federal question argument, the defendants contended that "given the nature of the federal crop insurance scheme, there exists a substantial federal question that justifies removal to the federal courts." Id. at 912. The court rejected this argument stating that to establish federal question jurisdiction under this theory the "defendants must demonstrate that 'some substantial disputed question of federal law [was] a necessary element of one of the well-pleaded state claims, or that one or the other claim is 'really' one of federal law.'" Id. (quoting McNeill v. Franke, 171 F.3d 561, 564 (8th Cir. 1999)). The court concluded that the plaintiffs' state law contract claims did not require an interpretation of federal regulations and were not disguised state law claims that actually presented federal questions. See id.

The defendants' final argument was that the district court had original jurisdiction over any claims against the FCIC. See id. at 913 (citing 7 U.S.C. Sec. 1506(d)). The defendants relied on 28 U.S.C. Sec. 1422 that provides that federal agencies may remove any civil action filed against them to federal court. See id. The court rejected this argument because "the FCIC-- the party which holds the right of removal-- is not a party to this case; it is, instead, merely joined as a third-party defendant." Id. The court added that including a party as a third-party defendant does not establish jurisdiction because the court must determine whether jurisdiction exists based only on the complaint. See id. (citing O'Neal v. CIGNA Prop. & Cas. Ins. Co., 878 F.Supp. 848, 849 (D.S.C. 1995) (observing that no original jurisdiction exists when FCIC was not named as a party)).

This case summary was prepared in August, 2002.