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IN THE UNITED STATES COURT OF APPEALS
FILED
FOR THE ELEVENTH CIRCUIT U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
________________________ MAR 29, 2001
THOMAS K. KAHN
Nos. 98-7015 & 99-10305 CLERK
________________________
D. C. Docket No. 96-1117-CV-1-CB-C
ALEX W. NEWTON,
Plaintiff-Appellee,
versus
CAPITAL ASSURANCE COMPANY, INC.,
Defendant-Appellant.
_______________________
Appeals from the United States District Court
for the Southern District of Alabama
_________________________
(March 29, 2001)
ON PETITION FOR REHEARING
Before ANDERSON, Chief Judge, HULL and COX, Circuit Judges.
COX, Circuit Judge:
Capital Assurance Company’s Petition for Rehearing, which the United States
has supported as amicus curiae, is GRANTED. We agree with the United States that
the opinion published at
209 F.3d 1302 misinterpreted parts of the Federal Emergency
Management Agency’s Financial Assistance/Subsidy Arrangement, 44 C.F.R. pt. 62,
app. A, and that we arrived at the wrong result. That opinion is accordingly
VACATED and the following opinion issued in its stead:
Capital Assurance Company, Inc. appeals the award of prejudgment interest in
an insurance contract action based on a federally subsidized Standard Flood Insurance
Policy it issued under Part B of the National Flood Insurance Act of 1968,
42 U.S.C.
§§ 4001-4041, 4071-4129 (1994 & Supp. II 1996) (NFIA). We address, for the first
time in this circuit, whether a district court violates sovereign immunity principles by
awarding prejudgment interest against a so-called “Write-Your-Own” company
empowered to issue flood insurance by the Federal Emergency Management Agency.
We hold that it does.
I. Background
Alex W. Newton owns a vacation house on the Gulf of Mexico that is
constructed on an artificially built-up point extending into the water and protected
only by bulkheads. Capital Assurance Company, Inc. (Capital) sold Newton a
federally subsidized Standard Flood Insurance Policy (SFIP) covering the property.
2
The Federal Emergency Management Agency (FEMA) uses “Write-Your-Own”
(WYO) companies like Capital to aid it in its statutory duty to administer the National
Flood Insurance Program (NFIP). See
42 U.S.C. § 4081(a) (permitting FEMA’s
Director to enter into arrangements with private insurance companies in order to make
use of their “facilities and services”);
44 C.F.R. § 62.23(a)-(d) (establishing the WYO
program to permit private insurers to sell and administer SFIPs). In 1995 Newton’s
house and lot suffered predictable extensive flood damage from Hurricane Opal, and
Newton filed a claim.
After Capital denied a portion of Newton’s claim, Newton sued in an Alabama
state court. The defendants removed the case, asserting original jurisdiction under
28
U.S.C. § 1331 and
42 U.S.C. § 4053. Following a bench trial, the court awarded
Newton compensatory damages, prejudgment interest, and costs. Capital appeals only
the award of prejudgment interest.1
1
Capital noticed appeal of the award of costs as well, but at oral argument the
parties stipulated to settlement of the costs issue.
3
II. Subject-Matter Jurisdiction
Although neither party has challenged the subject-matter jurisdiction of the
federal courts over this suit, we are compelled to address the question sua sponte, see,
e.g., Univ. of S. Ala. v. Am. Tobacco Co.,
168 F.3d 405, 410 (11th Cir. 1999), because
both the record and answers we received to questions posed at oral argument betray
some confusion on the issue. In the district court, Newton at first filed a motion to
remand for lack of federal-question jurisdiction. Capital opposed the motion, again
asserting jurisdiction under
28 U.S.C. § 1331 and
42 U.S.C. § 4053. For reasons
unclear from the record, Newton later conceded federal-question jurisdiction. We
now clarify that the district court had federal-question jurisdiction under
28 U.S.C. §
1331.
There are three statutes that potentially affect federal-question jurisdiction in this case:
the general “arising under” jurisdiction provision of
28 U.S.C. § 1331 and two
provisions of the NFIA,
42 U.S.C. § 4053 and
42 U.S.C. § 4072. We begin by
dispensing with § 4053; Capital’s reliance on that section was misplaced. Under
42
U.S.C. § 4041, the Director of FEMA may implement the NFIP using one of two
different institutional structures, each of which specifies a different role for private
insurance companies. The first scheme, described in
42 U.S.C. §§ 4051-4056,
includes a provision for suing private insurers, § 4053. The NFIP is, however, not
4
currently implemented under that scheme. It is instead implemented under the
alternative structure set forth in
42 U.S.C. §§ 4071-4072. See Van Holt v. Liberty
Mut. Fire Ins. Co.,
163 F.3d 161, 165 (3d Cir. 1998). It is thus clear from the statute
and the current implementation of the program that § 4053 does not apply to this suit.
We next turn to
28 U.S.C. § 1331. Under that section, federal courts have federal-
question jurisdiction over suits “in which a well-pleaded complaint establishes either
that federal law creates the cause of action or that the plaintiff’s right to relief
necessarily depends on resolution of a substantial question of federal law.” Franchise
Tax Bd. v. Constr. Laborers Vacation Trust,
463 U.S. 1, 27-28,
103 S. Ct. 2841, 2856
(1983). The federal cause of action or question of federal law must be apparent from
the face of the well-pleaded complaint and not from a defense or anticipated defense.
See
id. at 9-11,
103 S. Ct. at 2846-47. But the federal question need not be statutory;
federal common law will suffice. See Nat’l Farmers Union Ins. Co. v. Crow Tribe,
471 U.S. 845, 850,
105 S. Ct. 2447, 2451 (1985). Here, the complaint alleged, among
other things, breach of an SFIP contract. SFIP contracts are interpreted using
principles of federal common law rather than state contract law. See, e.g., Carneiro
da Cunha v. Standard Fire Ins. Co./Aetna Flood Ins. Program,
129 F.3d 581, 584
(11th Cir. 1997) (“‘As contracts, the standard policies issued under the Program are
governed by federal law, applying “standard insurance law principles.”’” (quoting
5
Wright v. Dir., Fed. Emergency Mgmt. Agency,
913 F.2d 1566, 1570-71 (11th Cir.
1990))). Thus, a complaint alleging breach of an SFIP satisfies § 1331 by raising a
substantial federal question on its face.
This leaves us only to question whether
42 U.S.C. § 4072, the provision for
suits against FEMA under the NFIP as currently implemented, affects our jurisdiction.
On its face, § 4072 provides only for suits against FEMA. It does not discuss the
WYO program, and we therefore do not read it as addressing suits against WYO
companies. It does not, therefore, abrogate § 1331 jurisdiction. See Carneiro da
Cunha,
129 F.3d at 586-87 (implicitly recognizing federal subject-matter jurisdiction
over a suit against a WYO company after the implementation of § 4072). We need
not consider the opposite question: whether it provides an additional basis for
jurisdiction against WYO companies, see Van Holt,
163 F.3d at 165-66 (finding WYO
companies subject to jurisdiction under § 4072 (as well as § 1331) because a suit
against a WYO company is the “functional equivalent” of a suit against FEMA),
because our conclusion regarding jurisdiction under § 1331 is sufficient to answer the
jurisdictional question we raise.
III. The No-Interest Rule
The issue Capital presents in this appeal is whether prejudgment interest awards
in suits against WYO companies selling federally sponsored SFIP contracts violate
6
the “no-interest rule,” the sovereign immunity principle that “[i]n the absence of
express congressional consent to the award of interest separate from a general waiver
of immunity to suit, the United States is immune from an interest award.” Library of
Congress v. Shaw,
478 U.S. 310, 314,
106 S. Ct. 2957, 2961 (1986). Although suits
against WYO companies are not suits against the federal government, Capital
nevertheless contends that prejudgment interest awards against WYO companies
always violate the no-interest rule because such awards constitute — as a legal
conclusion derived from the NFIA and its implementing regulations — “direct
charge[s] on the public treasury.” In re Estate of Lee,
812 F.2d 253, 256 (5th Cir.
1987). Newton, on the other hand, argues that the controlling laws give the
government no more than a “financial stake” in the payment of prejudgment interest
by WYO companies, which is, as the district court held, insufficient by itself to invoke
the no-interest rule in a given case. West v. Harris,
573 F.2d 873, 882 (5th Cir.
1978).2 We review the question de novo, see Powers v. United States,
996 F.2d 1121,
2
West v. Harris,
573 F.2d 873 (5th Cir. 1978), affirmed a prejudgment interest
award against a private company selling federal flood insurance. Our holding in this case does
not conflict with it, however; West was decided at a time when the structure of the NFIP
involved a more attenuated relationship between private insurance companies selling flood
insurance and the federal agency running the NFIP. The “Industry Program With Federal
Financial Assistance” at issue in West, 42 U.S.C. subch. II, pt. A, involved a pool of private
insurers selling flood insurance under an agreement between the pool as an entity (rather than
individual insurers) and the government (then represented by the Department of Housing and
Urban Development (HUD)). See
42 U.S.C. §§ 4051-4052. HUD provided only reinsurance
coverage when necessary and payments to the pool to make up for the issuance of insurance at
less-than-actuarial rates. See §§ 4054-4055. The insurance companies were, under explicit
7
1123 (11th Cir. 1993), and hold that the no-interest rule prohibits awards of
prejudgment interest against WYO companies.
We start our analysis by recognizing that those circuits considering the question
have, for important reasons, found the no-interest rule to bar awards of interest in suits
directly against FEMA. See Sandia Oil Co. v. Beckton,
889 F.2d 258, 263 (10th Cir.
1989) (holding, on reasoning equally applicable to awards of prejudgment interest,
that postjudgment interest may not be awarded in suits directly against FEMA); Lee,
812 F.2d at 256. To begin with, the cases note that nothing in the NFIA indicates a
Congressional waiver of immunity from interest awards. See Lee, 812 F.2d at 256;
see also Sandia Oil,
889 F.2d at 262 (citing Lee). Nor, as one court has further
concluded, does the NFIP produce a profit for the federal government against which
interest awards may sometimes be appropriate because the government’s role
resembles that of a profit-making, private entity. The NFIP is a subsidy program.3
statutory provisions, exclusively responsible for adjusting claims, paying claims, and defending
suits arising from disallowed claims, see § 4053. See also Van Holt,
163 F.3d at 165; Berger v.
Pierce,
933 F.2d 393, 394-95 (6th Cir. 1991) (both recounting the history of the NFIP). By
contrast, as Capital notes, today’s NFIP is a “Government Program With Industry Assistance.”
42 U.S.C. subch. II, pt. B. As we explain in the text, in this scheme the money to pay claims
comes from a federally administered fund rather than a subactuarial insurance pool.
3
On this point, the Tenth Circuit has found an exception to the no-interest rule for
engagement in profitable “‘commercial enterprise’” inapplicable. Sandia Oil,
889 F.2d at 261
(quoting Shaw,
478 U.S. at 317 & n.5,
106 S. Ct. at 2963 & n.5). The court compared the
holdings in the controlling cases, United States v. Worley,
281 U.S. 339,
50 S. Ct. 291 (1930)
and Standard Oil Co. v. United States,
267 U.S. 76,
45 S. Ct. 211 (1925), both of which dealt
with coverage disputes over insurance sponsored and sold by the United States government. It
noted that Worley, in which prejudgment interest was barred, distinguished Standard Oil, in
8
The holdings of our sister circuits are consistent with the Supreme Court’s articulation
of the no-interest rule. See Shaw,
478 U.S. at 314-17,
106 S. Ct. at 2961-63.
Moreover, Newton concedes that both Lee and Sandia Oil were correctly decided. We
use their conclusions as a starting point and examine the relationship between FEMA
and WYO companies to determine whether the no-interest rule bars prejudgment
interest awards against WYO companies as well.
Capital urges us to accept a dictum from the Fifth Circuit that any award of
prejudgment interest against a flood insurer is “a direct charge on the public treasury”
indistinguishable from identical awards in suits against FEMA itself and is thus
precluded by the no-interest rule. Lee, 812 F.2d at 256 (making the statement in the
context of a suit directly against FEMA). Cf. Gowland v. Aetna,
143 F.3d 951, 954-55
(5th Cir. 1998) (referring to Lee’s “direct charge” language and prohibiting
application of the doctrine of equitable estoppel against a WYO company because the
doctrine could not be applied against the federal government). To even entertain this
idea, we must accept the proposition that the no-interest rule can ever apply to shield
private entities from interest awards. We can do so because we recognize that
which prejudgment interest was allowed, because the government insurance program addressed
in Standard Oil was profitable while the program considered in Worley was not. See
id. at 262-
63 (citing Worley,
281 U.S. at 343,
50 S. Ct. at 293). Because the federal government subsidizes
rather than profits from the NFIP, the Tenth Circuit reasoned that the commercial enterprise
exception cannot apply to the NFIP. See id. at 263-64.
9
Congress should be able to implement federal programs using private entities rather
than government agencies without necessarily waiving protection of program funds
under the no-interest rule. We also recognize, however, that the rule as applied to
private entities should be a narrow one applicable only when the interest charge really
is, for all relevant purposes, directly against the federal government. To conclude
otherwise would allow private entities to use the no-interest rule to protect their purely
private concerns rather than public programs. This is why, as West holds, “a financial
stake in . . . [the flood insurance] program is not sufficient to cloak . . . [a] defendant
[insurance company] with the robe of sovereign immunity from awards of any
interest.” West,
573 F.2d at 882.
Even under this narrow view, however, Capital contends that the no-interest
rule protects it from the award in this case because the regulations detailing the
financial relationship between FEMA and WYO companies establish that interest
charges against WYO companies are direct charges against FEMA. We agree.
Capital begins by noting that although WYO companies initially collect premiums
from which they must pay claims (including those ordered paid only as a result of
litigation), and refunds, see 44 C.F.R. pt. 62, app. A, arts. II(E), III(D)(1)-(2), III(E),
the amount of the collected premiums actually controlled by and immediately
available to the WYO companies is severely curtailed by the regulations. Premiums
10
received must be kept in separate accounts,
id. app. A, art. II(E), and all funds not
required to meet current expenditures must be remitted to FEMA,
id. app. A, art.
VII(B). When the scant funds retained by the WYO company are not enough to
satisfy outstanding claims and refunds, the WYO companies must draw upon letters
of credit from FEMA.
Id. app. A, art. IV(A). Because premiums collected on the
policies do not belong to the WYO insurers, see
id. app. A, art. VII(B), claim
payments come out of FEMA’s pocket regardless of how they are paid.
Capital also points out the functionary status of the WYO companies in relation
to FEMA. Under the statute, WYO companies act as the “fiscal agents of the United
States,”
42 U.S.C. § 4071(a)(1); see also
44 C.F.R. § 62.23(f) (characterizing the
relationship between the federal government and WYO companies as “one of a
fiduciary nature” and intended to “assure that any taxpayer funds are accounted for
and appropriately expended”). WYO companies may not alter the terms of SFIPs, or
insert flood coverage into other policies.
44 C.F.R. § 62.23(c), (h)(6). Finally, they
must adjust claims under NFIP guidelines.
Id. § 62.23(i)(1).
Capital persuades us with these points — FEMA’s inevitable liability for claims
and its substantial administrative oversight — to join our fellow circuits in
concluding that the line between a WYO company and FEMA is too thin to matter for
the purposes of federal immunities such as the no-interest rule. See Flick v. Liberty
11
Mut. Fire Ins. Co.,
205 F.3d 386, 393-94 (9th Cir.) (relying on unlikelihood that
claims will be paid out of premiums, rather than federal fund, to conclude that WYO
policies are federal insurance policies financed by congressional authorization, and
that the Appropriations Clause therefore prohibits any “substantial compliance”
softening of proof-of-loss requirements), cert. denied,
121 S. Ct. 305 (2000); Van Holt
v. Liberty Mut. Fire Ins. Co,
163 F.3d 161, 166-67 (3d Cir. 1998) (concluding that a
suit against a WYO insurer is, for jurisdictional purposes, “in reality” a suit against
FEMA because FEMA pays the judgment and litigation costs); Gowland v. Aetna,
143
F.3d 951, 954-55 (5th Cir. 1998) (because losses WYO policies are paid from federal
funds, a WYO insurer cannot waive a right to a proof-of-loss statement, or be
equitably estopped from demanding one).
Newton does point to countervailing considerations that might suggest that
payment of claims is not a direct charge on federal funds. First, the regulations amply
demonstrate that the role accorded WYO companies is in minor respects more than
that of mere functionary. WYO companies may issue policies in their own names (as
Capital issued Newton’s) rather than in that of FEMA or the United States, see
44
C.F.R. § 61.13(f), and they may use their own, individual “customary business
practices”,
id. § 62.23(a); see also id. § 62.23(e). For example, a WYO company may
accept an application previously rejected by another WYO company. See id. §
12
62.23(h)(5). Similarly, WYO companies adjust claims in accordance with their own
“general [c]ompany standards,” although they must seek guidance from “NFIP
[c]laims manuals.” Id. § 62.23(i)(1). Finally, the regulations expressly deny that
WYO companies are general agents of the government; the companies are thus
“responsible for their obligations to their insureds under any flood insurance policies
issued.” Id. § 62.23(g). WYO companies, rather than FEMA, are thus initially
responsible for the “adjustment, settlement, payment and defense” of claims on the
policies they sell. Id. § 62.23(d) (emphasis added). A WYO company choosing to
defend against a claim must therefore seek reimbursement for its costs rather than
merely handing the case over to FEMA. See id. § 62.23(i)(6) (“[D]efense costs will
be part of the . . . claim expense allowance . . . .”). Reimbursement may be limited,
moreover, if a WYO company fails to meet certain documentation requirements. See
id. pt. 62, app. A, art. III(D)(2).
But the reality lying behind these observations robs them of their strength. A
WYO company may write a policy in its name, but FEMA dictates the terms. And
preliminary responsibility is a mirage when the federal government, through FEMA,
will always foot the full bill in the end. Giving these factors controlling weight would
elevate the form of the insurance system over its substance. We thus conclude that
prejudgment interest awards against WYO companies are direct charges on the public
13
treasury forbidden by the no-interest rule and reverse the part of the judgment
awarding such interest. The remainder of the judgment is unchallenged, and it is
accordingly affirmed.
AFFIRMED IN PART; REVERSED IN PART.
14
