Fairfax County Redevelopment & Housing Authority v. W.M. Schlosser Co.

Reversed and remanded by published opinion. Judge RUSSELL wrote the majority opinion, in which Judge HALL concurred. Judge WIDENER wrote a dissenting opinion.

OPINION

DONALD RUSSELL, Circuit Judge:

This is an appeal of a district court’s order affirming, on appeal, the state law findings of a Virginia state agency. We conclude that the district court was without jurisdiction to review the state agency’s findings and, therefore, we reverse.

I.

The case arose out of a contract dispute between Fairfax County Redevelopment and Housing Authority (Housing Authority) and W.M. Schlosser Company (Schlosser), a contractor who contracted to build a housing project for the Housing Authority. Schlos-ser alleged that the Housing Authority had not paid it in full under the parties’ contract and brought a state administrative claim for the amount owed. The Fairfax County Executive, to whom the claim was brought under Virginia’s administrative scheme, found that the Housing Authority had breached the parties’ contract and ordered it to pay Schlosser the amount Schlosser sought.

The Housing Authority appealed the County Executive’s decision to a Virginia circuit court under Va.Code § 11-71, which allows for judicial review of state administrative decisions involving contract disputes. Schlosser removed the Housing Authority’s appeal to federal district court. The district court reviewed the County Executive’s decision under Va.Code § 11-71 and, finding that the decision was not arbitrary or capricious, entered a judgment for Schlosser in the amount awarded by the County Executive.

II.

Removal of suits from state court to federal court is authorized by 28 U.S.C. § 1441, which states in relevant part: “[A]ny civil action brought in a State court of which the district courts of the United States have original jurisdiction ... may be removed by the defendant_” 28 U.S.C. § 1441(a). The district court here determined that it had original jurisdiction over the Housing Authority’s appeal of the County Executive’s decision under 28 U.S.C. § 1332, the diversity statute. Section 1332 provides that “[t]he district courts shall have original jurisdiction of all civil actions” in which the amount in controversy exceeds $50,000 and the parties are diverse. 28 U.S.C. § 1332(a).

The Supreme Court in Burford v. Sun Oil Co., 319 U.S. 315, 63 S.Ct. 1098, 87 L.Ed. 1424 (1943), considered whether a federal district court may, under its diversity jurisdiction, review the findings of a state administrative agency. An oil company had brought an action in federal court to enjoin a state commission’s decision to grant a drilling permit. The recipient of the permit argued to the Supreme Court that, as the action was an appeal from a state agency, the federal district court lacked jurisdiction to hear it. The Court found that the district court did have jurisdiction, but only because the action was not an “appeal from the State Commission,” but “a simple proceeding in equity to enjoin the enforcement of the Commission’s order.” Id. at 317, 63 S.Ct. at 1099. The Court noted: “[0]f course the Texas Legislature may not make a federal district court, a court of original jurisdiction, into an appellate tribunal....” Id.

The Court applied this rule that federal district courts are courts of original jurisdiction and, thus, cannot review on appeal findings of state agencies in Chicago, Rock Island & Pac. R.R. v. Stude, 346 U.S. 574, 74 S.Ct. 290, 98 L.Ed. 317 (1954), where a railroad company had asked a federal district court in its diversity jurisdiction to review a state agency’s assessment of condemnation damages owed to a landowner. The Supreme Court affirmed the district court’s dismissal of this action, stating:

The United States District Court for the Southern District of Iowa does not sit to review on appeal action taken administratively or judicially in a state proceeding. A state “legislature may not make a federal district court, a court of original jurisdiction, into an appellate tribunal....”

Id. at 581, 74 S.Ct. at 295 (quoting Burford, 319 U.S. at 317, 63 S.Ct. at 1099).¹

The issue arose once again in Horton v. Liberty Mut. Ins. Co., 367 U.S. 348, 81 S.Ct. 1570, 6 L.Ed.2d 890 (1961). In that case, a state board had granted a worker’s compensation award to an employee; under state law, the employer’s insurance company could contest such an award in a trial de novo. When the employer’s insurance company sought to proceed with this trial in federal district court, the employee contended the district court was without jurisdiction because the action was an appeal from a state agency. The Court determined that the federal district court had jurisdiction only after finding that the trial there was not an appellate proceeding: “The suit to set aside an award of the board is in fact a suit, not an appeal.... [T]he trial in court is not an appellate proceeding. It is a trial de novo wholly without reference to what may have been decided by the Board.” Id. at 354-55, 81 S.Ct. at 1574 (quotation omitted).²

The courts of appeals, with one exception, have consistently followed the Supreme Court and held that federal district courts are without jurisdiction to review on appeal findings of state agencies. The Tenth Circuit addressed the issue most comprehensively in Trapp v. Goetz, 373 F.2d 380 (10th Cir.1966), where a claimant asked a federal district court, in its diversity jurisdiction, to review a state agency’s finding that she was not eligible for pension benefits. Citing Bur-ford and Stude, the court stated: “[T]he United States District Court had no power to consider an appeal from the state administrative tribunal. Such a proceeding is not within its statutory jurisdiction.” Id. at 383. See also FSK Drug Corp. v. Perales, 960 F.2d 6, 11 (2d Cir.1992) (“This Court lacks jurisdiction to hear [appellant’s] claim that the [state agency’s] substantive decision was arbitrary and capricious.”); Shell Oil Co. v. Train, 585 F.2d 408, 414-15 (9th Cir.1978) (holding that federal district court was without jurisdiction to review state agency denial of environmental permit); Volkswagen de Puerto Rico, Inc. v. Puerto Rico Labor Relations Bd., 454 F.2d 38, 42 (1st Cir.1972) (“To the extent that the federal district court would treat a case removed from the [state court] as a review of a[ ] [state] administrative decision ..., this would place a federal court in an improper posture vis-a-vis a non-federal agency.”) (citing Stude); cf. Frison v. Franklin County Bd. of Educ., 596 F.2d 1192, 1194 (4th Cir.1979) (“[T]he [district] court should have declined pendent jurisdiction over this state law claim because it is essentially a petition for judicial review of state administrative action rather than a distinct claim for relief.”). Only the Eighth Circuit, in Range Oil Supply Co. v. Chicago, Rock Island & Pac. R.R. Co., 248 F.2d 477 (8th Cir.1957), failed to follow the Supreme Court on this issue and held that a federal district court may, under its diversity jurisdiction, review on appeal the findings of a state agency. Id. at 479. Significantly, the Range Oil court did not consider that the diversity statute vests only “original” and not “appellate” jurisdiction in the district courts. See Stude, 346 U.S. at 581, 74 S.Ct. at 295; Burford, 319 U.S. at 317, 63 S.Ct. at 1099.

In the case at bar, the federal district court, in its diversity jurisdiction, reviewed the Fairfax County Executive’s finding that the Housing Authority had not fully compensated Sehlosser under the parties’ construction contract. The district court performed this review under Virginia’s “Administrative appeals procedure” set forth in Va.Code § 11-71, which provides for “judicial review” of the County Executive’s decision. In this review:

the findings of fact shall be final and conclusive and shall not be set aside unless the same are fraudulent or arbitrary or capricious, or so grossly erroneous as to imply bad faith. No determination on an issue of law shall be final if appropriate legal action is instituted in a timely manner.

Va.Code Ann. § 11-71. The district court entered judgment in the amount awarded by the County Executive after determining that the County Executive’s finding was not arbitrary and capricious. Because the district court is “a court of original jurisdiction,” not “an appellate tribunal,” Stude, 346 U.S. at 581, 74 S.Ct. at 295; Burford, 319 U.S. at 317, 63 S.Ct. at 1099, and, thus, is without jurisdiction “to review on appeal action taken administratively or judicially in a state proceeding,” Stude, 346 U.S. at 581, 74 S.Ct. at 295, it was without jurisdiction to conduct such a review of the County Executive’s finding. We, therefore, reverse the district court’s order affirming the County Executive’s decision and remand for the district court to further remand the case to Virginia Circuit Court, which properly has jurisdiction over the appeal from the County Executive.

Before concluding, we will respond to the points raised in the dissenting opinion. Initially, the dissent contends that the review procedure set forth in section 11-71 is a de novo trial, citing Cross v. United States, 512 F.2d 1212 (4th Cir.1975), and ALCOA v. EPA, 663 F.2d 499 (4th Cir.1981), and concludes, therefore, that the district court had jurisdiction to conduct this review procedure under Stude. Post at 159-160. We disagree that a review procedure under which factual findings are conclusive unless found to be fraudulent, arbitrary or capricious, or so grossly erroneous as to imply bad faith can be fairly characterized as a de novo trial.

Neither Cross nor ALCOA supports the dissent’s contention. We held in Cross that the procedure provided in the federal Food Stamp Act to review food stamp disqualification decisions of a federal agency, under which the party challenging the agency decision was entitled to a “trial de novo” in district court to determine “the validity of the questioned administrative action,” required that the district court review the agency’s decision about the length of the disqualification under the “arbitrary and capricious” standard and review the agency’s decision about the fact of the violation under a “broadfer]” standard. Cross, 512 F.2d at 1218. Cross did not find that review under the “arbitrary and capricious” standard is equivalent to a trial de novo—had it so found, it would have determined that the district court’s review of the agency’s decision about the fact of the violation was under this standard rather than a broader one. ALCOA, which states that a “ ‘de novo determination’ ... does not necessarily mean a de novo hearing,” ALCOA 663 F.2d at 502, provides no better assistance for the dissent. Even if Stude would permit a federal district court to make, without a de novo hearing, a de novo determination of an issue previously decided by a state agency, that would have no relevance here where the district court was not asked to make a de novo determination of the parties’ contract dispute but to review the state agency’s determination of this dispute under an “arbitrary or capricious” standard.

Alternatively, the dissent asserts that we should refuse to follow the Supreme Court’s holding in Stude that a federal district court may not review on appeal the state law findings of a state agency. Post at 160-163. To support this assertion, it states that the Supreme Court has never followed Stude, post at 160, that Stude is contrary to the Court’s earlier decisions in Madisonville Traction Co. v. St. Bernard Mining Co., 196 U.S. 239, 25 S.Ct. 251, 49 L.Ed. 462 (1905), and Guaranty Trust Co. v. York, 326 U.S. 99, 65 S.Ct. 1464, 89 L.Ed. 2079 (1945), post at 161, that Stude was incorrectly decided because appeals from state agencies are “civil actions” that are within a federal district court’s diversity jurisdiction, post at 161-162, and that Stude is unwise as a policy matter because it allows states to divest federal courts of jurisdiction and discourages parties from utilizing state administrative procedures, post at 162. While the Supreme Court has never had occasion to follow its holding in Stude that federal district courts may not review on appeal the state law findings of a state agency, however, it has stated this holding as the law on at least two other occasions in Horton and Burford, see supra. And Stude is not contrary to either Madisonville Traction, which, similar to Horton, held that a federal court has jurisdiction to conduct a de novo jury trial on issues previously decided by a state agency, Madisonville Traction, 196 U.S. at 242, 25 S.Ct. at 252, or to Guaranty Trust, which held that a federal court in a diversity suit must apply the state statute of limitations, Guaranty Trust, 326 U.S. at 112, 65 S.Ct. at 1471.³ Most importantly, even if the rule set forth in Stude was contrary to the Supreme Court’s prior decisions and has not been stated subsequently by the Court, we cannot simply ignore it because we believe that Stude was incorrectly decided and is unwise as a policy matter. Stude has never been overruled by the Supreme Court either explicitly or implicitly and, at least until the Court directs to the contrary, we are bound to follow it.

III.

For the reasons, we reverse the district court’s order and remand with the instructions set forth above.

REVERSED AND REMANDED.

1 . Stude involved an appeal of two separate actions. A complete analysis of the Court’s holding in Stude requires that we mention the Supreme Court’s treatment of both actions.

As we indicated, a state agency had assessed condemnation damages owed by a railroad to a landowner; to contest this assessment, the railroad pursued two avenues. First, as we discussed, it filed a complaint in the federal district court asking the district court to review the state agency's damages assessment. The Supreme Court found that the district court was without jurisdiction to conduct such a review because the district court "does not sit to review on appeal action taken administratively or judicially in a state proceeding.” Id. at 581, 74 S.Ct. at 295.

Second, the railroad appealed the state agency’s assessment of condemnation damages under the procedure established by the state for administrative appeals. Under this procedure, the losing parly before the state agency appeals to state court, and the party’s case is "tried [by the state court] as in an action by ordinary proceedings,” id. at 576, 74 S.Ct. at 292 (quoting Iowa Code § 472.21 (1950)). The railroad filed a notice of appeal seeking this de novo trial of its case in state court; it then attempted to remove this trial to federal court. The Supreme Court found that this de novo trial was "in its nature a civil action and subject to removal by the defendant to the United States District Court,” id. at 578-79, 74 S.Ct. at 294, but determined that removal by the railroad was improper because the railroad was not a defendant.

The Court’s holding on this second issue that the federal district court would have had jurisdiction over this removed case had it been removed by the defendant does not affect our analysis here. The removed case did not seek a review by the district court of the state agency's condemnation assessment, but a de novo proceeding "tried [by the state court] as in an action by ordinary proceedings," id. at 576, 74 S.Ct. at 293 (quoting Iowa Code § 472.21 (1950)). See note 2 infra.

2 . The Supreme Court in several older cases similarly found that federal district courts had jurisdiction over certain “appeals” from state agencies when these “appeals” were by trial de novo, and, thus, did not involve review of the state agencies’ findings. See, e.g., City Bank Farmers Trust Co. v. Schnader, 291 U.S. 24, 30, 54 S.Ct. 259, 261, 78 L.Ed. 628 (1934); Commissioners of Road Improvement v. St. Louis Southwestern Ry. Co., 257 U.S. 547, 556, 42 S.Ct. 250, 253, 66 L.Ed. 364 (1922); Mississippi & Rum River Boom Co. v. Patterson, 98 U.S. 403, 406-07, 25 L.Ed. 206 (1878).

3 . The dissent also states that this Court and one other court of appeals have not followed Stude's holding, citing Rowland v. Patterson, 882 F.2d 97 (4th Cir.1989), Davison v. Sinai Hosp., 617 F.2d 361 (4th Cir.1980), aff'g, 462 F.Supp. 778 (D.Md.1978), and Woods v. Holy Cross Hosp., 591 F.2d 1164 (5th Cir.1979). Each of these cases involved state procedures for medical malpractice claims under which claimants must exhaust state arbitration or mediation mechanisms before they are entitled to trials de novo by juries in state or federal court. In these trials, the findings of the arbitrators and mediators are admissible. These cases do not conflict with Stude because federal district courts are not reviewing on appeal the findings of state agencies when they conduct such de novo jury trials, even if the arbitration or mediation findings are admitted as evidence in these trials. Even if they did conflict with Stude, none of these cases even raised the Stude issue and they should not affect our analysis.