Plants, Inc. v. Fireman's Fund Insurance Company

IN THE COURT OF APPEALS OF TENNESSEE
AT NASHVILLE
May 22, 2012 Session
PLANTS, INC. v. FIREMAN’S FUND INSURANCE COMPANY ET AL.
Appeal from the Circuit Court for Warren County
No. 3353CV Larry B. Stanley, Jr., Judge
No. M2011-02063-COA-R3-CV - Filed August 13, 2012
At issue is the scope of a binding arbitration clause in a federally-reinsured multiple peril
crop insurance policy and the scope of federal preemption of common law claims. The
insured, a nursery in Warren County, Tennessee, suffered a catastrophic loss of stock,
primarily trees and shrubs, due to a tornado on April 7, 2006. The insured submitted a claim
in excess of a million dollars. The adjuster determined, due to “under-reporting of
inventory”, that the insured was only entitled to recover $195,225. The insured demanded
arbitration; the arbitrator ruled that the insured was due no additional payment. Thereafter,
the insured filed this action asserting common law claims against the insurer, its adjustment
firm, and the independent insurance agency that solicited the policy, for breach of contract,
negligence, breach of the duty of care, negligent misrepresentation, and statutory bad faith.
The trial court summarily dismissed the claims against the insurer and its adjustment firm
finding the claims were barred by collateral estoppel and res judicata because the issues were
decided at arbitration and that the insured’s only remedy was judicial review of the
arbitration decision. On appeal, the insured contends that its state law claims were not barred
by the doctrines of collateral estoppel and res judicata. Appellees disagree and additionally
assert that the insured’s common law claims are preempted by federal law. We have
determined the claims for breach of contract, breach of duty of care, and statutory bad faith
are preempted by federal law; however, the claims for negligence and negligent
misrepresentation are not preempted by federal law and are not barred by the doctrines of
collateral estoppel or res judicata. Therefore, we affirm in part, reverse in part, and remand
this action for further proceedings in accordance with this decision.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Circuit Court
Affirmed in Part; Reversed in Part and Remanded
F RANK G. C LEMENT, JR., J., delivered the opinion of the Court, in which A NDY D. B ENNETT,
J., and B EN H. C ANTRELL, S R. J., joined.
Mickey Hall, Winchester, Tennessee, for the appellant, Plants, Inc.
Jeffrey S. Dilley, Clarksdale, Mississippi, for the appellees, Fireman’s Fund Insurance
Company, Rural Community Insurance Company, Rural Community Insurance Services,
Wheeler Insurance Agency, Inc., and Louis M. Wheeler, individually, and as agent for other
defendants.
OPINION
This is one of two separate civil actions and appeals by the plaintiff/appellant Plants,
Inc. The separate cases arise from two substantial losses to Plants’ nursery stock in April of
consecutive years. The first loss, which is at issue in this appeal, was due to a tornado in
April of 2006. The second loss, which is at issue in a separate appeal, was due to a severe
freeze that occurred in April of 2007.1 The issues in both cases pertain to the same policy of
insurance and the scope of the arbitration clause therein.
Plants, the owner and operator of a tree and shrub nursery in Warren County,
Tennessee, was insured in 2006 under a federally-reinsured multiple peril crop insurance
(“MPCI”) policy2 issued by Fireman’s Fund Insurance Company (“Fireman’s Fund”) and
serviced by Rural Community Insurance Agency, Inc. d/b/a Rural Community Insurance
Services (“RCIS”). The independent agent through which the policy was sold to Plants was
Louis M. Wheeler of Wheeler Insurance Agency, Inc.
Following the tornado in April of 2006, Plants timely reported its claim for inventory
losses to RCIS, which was responsible for adjusting the loss. In the course of its
investigation, RCIS determined that Plants was under-insured, meaning that the value of
Plants’ inventory on the date of loss, April 7, 2006, exceeded the value reported on the
application. This triggered the application of an under-insured report factor (“URF”). Based
upon this, RCIS determined that Plants was entitled to recover only $195,225. As a result
Plants demanded arbitration as is required under the policy.
During arbitration, Plants contended that it should not be held to the terms of the
policy because of misrepresentations made by Louis Wheeler regarding coverage and
because RCIS failed to provide a copy of the insurance policy to Plants. A final award was
1
See Plants, Inc. v. Fireman’s Fund Insurance Company, et al., No. M2011-02274-COA-R3-CV,
2012 WL _____ (Tenn. Ct. App. July __, 2012).
2
MCPI policies are governed by and issued under authority of the Federal Crop Insurance Act, 7
U.S.C.A. § 1501 et seq. and regulations promulgated under authority of the Act.
-2-
issued by the arbitrator on May 30, 2008, in which the arbitrator ruled that Plants was not
entitled to any additional indemnity under the policy. The arbitrator also rejected Plants’ state
law claims, which the arbitrator held were preempted by federal law unless Plants could
demonstrate that RCIS failed to comply with FCIC procedures. Plants did not seek judicial
review of the arbitration award.
On May 22, 2009, Plants filed this action in the Circuit Court for Warren County
against RCIS, Fireman’s Fund, Rural Community Insurance Company, Wheeler Insurance
Agency, and Louis Wheeler.3 In this action, Plants asserted claims for breach of contract,
negligence, breach of the duty of care, negligent misrepresentation, and statutory bad faith
pursuant to Tennessee Code Annotated § 56-7-105. RCIS, Fireman’s Fund, and RCIC filed
motions for summary judgment. By order entered on February 25, 2011, the trial court
granted summary judgment upon the finding that the issue of whether Plants was entitled to
additional indemnity was fully addressed in the arbitration and the trial court was not
permitted to review this decision based upon principles of res judicata and collateral
estoppel.4 RCIS, Fireman’s Fund, and RCIC thereafter filed a motion for entry of a final
judgment, which the trial court granted pursuant to Tennessee Rule of Civil Procedure 54.02.
Plants filed a timely appeal.
A NALYSIS
In this appeal, Plants asserts that the trial court erred in dismissing its state law claims
against Fireman’s Fund, RCIC, and RCIS (“collectively Defendants”) based upon the
doctrines of res judicata and collateral estoppel. Plants contends the arbitration was limited
in scope to an interpretation of the terms of the policy. It also contends the sole state law
claim advanced in the arbitration was for reformation of the insurance policy based upon the
alleged misrepresentations. Defendants contend the trial court correctly ruled that the
doctrines of res judicata and collateral estoppel bar Plants’ state law claims because, it
asserts, they were addressed in arbitration. Defendants further assert that such claims are
preempted by federal law governing these types of insurance policies and, therefore, Plants
was precluded from bringing such claims outside of the procedures set forth in the federal
statutes and regulations, which require arbitration and a judicial review of the arbitration as
the exclusive remedy.
3
An amended complaint was filed on April 22, 2010.
4
Defendants, Wheeler Insurance Company and Louis Wheeler, also filed motions for summary
judgment, which the trial court denied because they were not parties to the arbitration and the court found
there were genuine issues of material fact as to Plants’ claims against these defendants. Thus, Plants’ claims
against Wheeler Insurance Company and Louis Wheeler remain viable in the trial court.
-3-
This appeal arises from the grant of summary judgment upon a legal determination
that Plants’ claims were barred by the doctrine of res judicata and collateral estoppel. There
are no genuine issues of material fact and the issues on appeal present questions of law, upon
which we review the trial court’s judgment de novo with no presumption of correctness.
Martin v. Norfolk Southern Ry. Co., 271 S.W.3d 76, 84 (Tenn. 2008).
I. Federal Crop Insurance
Multiple peril crop insurance (“MPCI”) is a federally regulated and subsidized
insurance made available to farmers pursuant to the Federal Crop Insurance Act (“FCIA”),
7 U.S.C.A. § 1501 et seq. Ledford Farms v. Fireman’s Fund Ins. Co., 184 F. Supp. 2d 1242,
1243 (S.D. Fla. 2001). The terms and conditions of MPCI policies are mandated by the
Federal Crop Insurance Corporation (“FCIC”), which is a governmental corporation and an
agency of and within the United States Department of Agriculture and was created pursuant
to the FCIA. Nobles v. Rural Comty. Ins. Servs., 303 F. Supp. 2d 1292, 1295 (M.D. Ala.
2004); Ledford Farms, 184 F. Supp. at 1243. Despite the governance by the FCIC, MPCI
policies can be issued by private insurance companies; however, these policies are subject
to regulations and provisions promulgated by the FCIC concerning the sale, issuance, and
service of MPCI policies. Nobles, 303 F. Supp. 2d at 1295. All MCPI policies are “backed
(reinsured) by the FCIC; all premiums collected for MPCI policies are paid to the United
States government, and all claims paid under MPCI policies are paid with United States
Treasury funds.” Id.
II. Arbitration Provision & Federal Preemption
The Basic Provisions of the MPCI policies contain a section entitled “Mediation,
Arbitration, Appeal, Reconsideration, and Administrative and Judicial Review,” which is set
forth in the federal regulation 7 C.F.R. § 457.8:
(a) If you and we fail to agree on any determination made by us except those
specified in section 20(d), the disagreement may be resolved through
mediation in accordance with section 20(g). If resolution cannot be reached
through mediation, or you and we do not agree to mediation, the disagreement
must be resolved through arbitration in accordance with the rules of the
American Arbitration Association (AAA), except as provided in sections 20(c)
and (f), and unless rules are established by FCIC for this purpose. Any
mediator or arbitrator with a familial, financial or other business relationship
to you or us, or our agent or loss adjuster, is disqualified from hearing the
dispute.
-4-
(b) Regardless of whether mediation is elected:
(1) The initiation of arbitration proceedings must occur within
one year of the date we denied your claim or rendered the
determination with which you disagree, whichever is later;
(2) If you fail to initiate arbitration in accordance with section
20(b)(1) and complete the process, you will not be able to
resolve dispute through judicial review;
(3) If arbitration has been initiated in accordance with section
20(b)(1) and completed, and judicial review is sought, suit must
filed not later than one year after the date the arbitration decision
was rendered;
(4) In any suit, if the dispute in any way involves a policy or
procedure interpretation, regarding whether a specific policy
provision or procedure is applicable to the situation, how it is
applicable, or the meaning of any policy provision or procedure,
an interpretation must be obtained from FCIC in accordance
with 7 CFR part 400, subpart X or such other procedures as
established by FCIC. Such interpretation will be binding.
(c) Any decision rendered in arbitration is binding on you and us unless
judicial review is sought in accordance with section 20(b)(3). Notwithstanding
any provision in the rules of the AAA, you and we have the right to judicial
review of any decision rendered in arbitration.
...
(f) In any mediation, arbitration, appeal, administrative review, reconsideration
or judicial process, the terms of this policy, the Act, and the regulations
published at 7 CFR chapter IV, including the provisions of 7 CFR part 400,
subpart P, are binding. Conflicts between this policy and any state or local
laws will be resolved in accordance with section 31. If there conflicts between
any rules of the AAA and the provisions of your policy, the provisions of your
policy will control.
Defendants argue that this arbitration provision, which is a federal regulation, bars as
a matter of law any claims against them. Defendants argue that because the policy terms are
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defined by federal law, any claims against Defendants are preempted. In addition to the
arbitration provision set forth above, Defendants also argue that two other regulations, 7
C.F.R. § 400.176 and 7 C.F.R. § 400.352, provide further support for federal preemption for
all claims arising in connection with MPCI policies.
Plants demanded arbitration as required by the MPCI policy and FCIC regulations.
In the arbitration, Plants asserted that the policy should be reformed due to alleged
misrepresentations of Louis Wheeler, the agent who solicited the policy, and because RCIS
failed to deliver a copy of the policy to Plants. The arbitrator found that the policy, which
was itself a federal regulation, was “binding on insureds regardless of actual knowledge of
what was in the policies or regulations issued by the FCIC.” Thus, the arbitrator found that
it was “unable to reform the policy to take into account the claims made by Plants, which
[were] grounded in state law.” 5
Plants cites to Nobles v. Rural Community Insurance Services, 303 F. Supp. 2d 1292(M.D. Ala. 2004), in support of its position that its state law claims are still viable and not
precluded based upon federal preemption. In Nobles, two insureds filed suit against their
insurer for state law claims for breach of contract, fraud, suppression of material facts,
negligence and wantonness, negligent and wanton failure to supervise and train employees,
and bad faith. Id. at 1295. The claims were based on allegations that the insurer told them
their land was insurable under a MPCI policy, but later denied the crop-loss claim on the
basis that their land was uninsurable.6 Id. The insurer claimed that the state law claims were
preempted by the FCIA and FCIC regulations. Id. at 1297. Notably, the insurer in Nobles did
not argue that the FCIA completely preempted state law. Instead, the insurer argued that it
was complying with established FCIC rules, regulations, and directives when it informed the
insureds of the denial, and therefore any state law claims were inconsistent with FCIC
regulations and therefore preempted. Id. at 1296-97. In making its argument, the insurer
relied upon a Tenth Circuit Court of Appeals opinion Meyer v. Conlon, 162 F.3d 1264, 1268
(10th Cir. 1998), in which the court stated that “state law applies to FCIA contracts, with two
exceptions: (1) when FCIC contracts provide that state law does not apply and (2) when state
law is inconsistent with FCIC contracts.” Id. at 12977 (quoting Meyer, 162 F.3d at 1268)
5
Plants did not seek judicial review of the arbitrator’s award, the procedure stated in the policy and
federal regulations; instead, Plants filed this action.
6
The actions were originally brought in state court, however, the action was removed to the federal
court based upon diversity of citizenship jurisdiction. Nobles, 303 F. Supp. 2d at 1294.
7
It should be noted that in the decision in Meyers, the court rejected the complete preemption
argument stating: “The FCIA does not wholly preempt state law; rather, it preempts state law inconsistent
(continued...)
-6-
(citing 7 U.S.C.A. § 1506(l). The insurer also pointed to FCIC regulation 7 C.F.R. § 400.352,
which addressed the preemption of state and local laws and regulations, for the argument that
“lawsuits based on actions authorized or required by the FCIC regulations or the FCIA are
preempted by federal law.” Id. The regulation stated:
State or local governmental entities or non-governmental entities are
specifically prohibited from . . . (4) levy[ing] fines, judgments, punitive
damages, compensatory damages, or judgments for attorney fees or other costs
against companies . . . arising out of actions or inactions on the part of such .
. . entities authorized or required under the Federal Crop Insurance Act or by
regulations or procedures issued by the Corporation (nothing herein is intended
to preclude any action on the part of any authorized. . . entity concerning any
actions or inactions on the part of the . . . company whose actions or inaction
is not authorized or required under the Federal Crop Insurance Act, the
regulations, any contract or agreement authorized by the Federal Crop
Insurance Act or by regulations or procedures issued by the Corporation).
7 C.F.R. § 400.352(b)(4) (2004).8
The court rejected the insurer’s argument finding that it was “flawed” for two main
reasons. Nobles, 303 F. Supp. 2d at 1297. First, the court noted that the underlying assertion
in the insureds’ state law claims was not the ultimate denial of their insurance coverage, but
the act of the insurer in telling them that their land was insurable, when under the FCIC
regulations it was not, which was not an action required under the regulations. Id. Further,
the court noted as to the state law claims for suppression of material fact and negligence and
wantonness claims, the failure of the insurer to inform the insureds of certain provisions
under the insurance contract was also not a requirement of the regulations. Id. Therefore, the
court held that the state law claims fell within the parenthetical language contained in 7
C.F.R. § 400.352(b)(4), which stated ‘“nothing herein is intended to preclude any action on
the part of any authorized . . . entity concerning any actions or inactions on the part of the .
. . company whose action or inaction is not authorized or required’ under the FCIA or the
FCIC rules and regulations.” Id. at 1298 (quoting 7 C.F.R. § 400.352(b)(4)) (emphasis in
original).
7
(...continued)
with the purpose of the Act.” Id. (citing Meyers, 162 F.3d at 1268).
8
As we shall address later in this opinion, the language of this regulation has changed since the
opinion in Nobles.
-7-
The Nobles court also rejected the insurer’s assertion that “any time an insurance
company denies a claim because it believes FCIC regulations require the claim to be denied,
any state-law claims by the party whose insurance claim was denied would be preempted by
federal law.” Id. The court rejected this argument citing the decision of the Eleventh Circuit
Court of Appeals in Williams Farms of Homestead, Inc. v. Rain and Hail Ins. Servs., Inc.,
121 F.3d 630 (11th Cir. 1997), which held that “Congress intended to leave insureds with
their traditional contract remedies against their insurance companies. Such remedies include
a state law breach of contract claim. . . . The existence of a claim against a private reinsured
company is therefore consistent with the scheme of the FCIA.” Id. (quoting Williams, 121
F.3d at 635). The Nobles court also looked to additional language in Meyers for its decision,
which permitted state law causes of action, including those for breach of contract, negligent
misrepresentation, and bad faith, finding they were not precluded by the FCIA or FCIC
regulations. Id. (citing Meyers, 162 F.3d at 1269-70). Thus, the Nobles court determined that
the state law claims asserted in that action were not explicitly preempted by the FCIC or
FCIA regulations, and, therefore, were not preempted by federal law. Id.
The United States District Court for the Southern District of Florida, addressed the
interplay between state law claims, federal preemption, and the arbitration provisions
applicable to MPCI policies in Ledford Farms, Inc. v. Fireman’s Fund Ins. Co., 184 F. Supp.
2d 1242 (S.D. Fla. 2001). In that case, an insured filed suit in state court seeking a
declaratory judgment to gain coverage under its MPCI policy for loss of its bean crop, and
additionally asserting state law claims for breach of contract and breach of the implied
obligation of good faith. Id. Prior to filing suit, the insured submitted a claim to its insurance
company, but was denied based upon a determination that the farm failed to replant when it
was practicable to do so, which was an exclusion under the policy. Id. at 1244. The insurance
contract contained a previous version of the above-quoted arbitration provisions promulgated
by the FCIC, which stated that: “If [insured] and [insurer] fail to agree on any factual
determination, the disagreement will be resolved in accordance with the rules of the
American Arbitration Association.” Id. (quoting 7 C.F.R. § 451.8 (1998)). The district court
looked to the decision in Nobles for guidance and held that the arbitration clause was not a
complete bar to suit, but rather was a condition precedent that must be satisfied before an
insured could commence legal action against the insurer. Id. at 1245. The court held that the
determination of whether it was practicable to replant was a factual determination that must
be resolved during binding arbitration, so the court stayed the state law causes of action
pending the outcome of the arbitration proceeding. Id.
Several other courts have rejected so-called complete preemption arguments. In
Reimers v. Farm Credit Services AgCountry, No. CIV. A3-00-168, 2001 WL 1820379 (N.D.
S.E. Jun. 22, 2001), the district court addressed the issue of complete preemption, “which
converts an ordinary state law claim into a federal claim where the preemptive force of a
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statute is so extraordinary that it converts an ordinary state common-law complaint into one
stating a federal claim for purposes of the well-pleaded complaint rule” for federal question
jurisdiction. Id. at *2 (quoting Gore v. Trans World, 210 F.3d 944, 949 (8th Cir. 2000)).9 The
insureds in the action were five farmers who filed state law causes of action for breach of
contract, professional negligence, misrepresentation, fraud, and violations of the North
Dakota Insurance Code and Fraud Code against their insurer stemming from the partial
denial of their claims for crop loss under their MPCI policies. Id. at *1. The court examined
the issue of federal preemption in determining whether it had jurisdiction to entertain the
state law causes of action. Id. After examining cases from other jurisdictions, the court
determined that “the FCIA does not have the extraordinary preemptive force necessary for
the application of the doctrine of complete preemption” such to give the district court
jurisdiction.10 The court reached this decision after examining several provisions of the FCIA
and determining that none of its language expressly preempted state law claims such as the
ones at issue in the action. Id. at *4. The court also addressed the preemptive effect of
regulations promulgated by the FCIC under the authority of the FCIA, specifically discussing
the two regulations cited by the Defendants in this action:
To be sure, the FCIC regulations do preempt and limit certain state and local
government action and interference. See 7 C.F.R. § 400.352 (listing examples
of actions that are specifically prohibited). See also State of Kansas ex rel.
Todd v. United States, 995 F.2d 1505, 1512 (10th Cir.1993) (holding that state
regulations that interfere with the purpose of FCIA and its crop reinsurance
contracts are preempted). Nevertheless, this type of preemption is merely a
defense to a lawsuit; it is not a jurisdictional limitation. See Hurt v. Dow
Chem. Co., 963 F.2d 1142, 1144–45 (8th Cir.1992) (explaining that removal
is not necessarily appropriate even if state-law authority is preempted). In
9
Regular preemption analysis focuses on whether Congress intended to
preempt state law. This intention can be found through an express provision
in the statute or it may be implied where the scope of the statute indicates
that Congress intended the federal law to exclusively occupy the field, or
where state law is in actual conflict with federal law, or where state law
stands as an obstacle to the accomplishment and execution of the full
purpose and objective of Congress.
Id. at *2 (citing Harris v. Great Dane Trailers, Inc., 234 F.3d 398 (8th Cir. 2000)). “Congress may delegate
the preemption decision to the agency it authorizes to administer or enforce the federal statute.” Id. (citing
Symers v. SmithKline Beecham Corp., 152 F.3d 1050 (8th Cir. 1998)).
10
The district court noted, however, that it was not resolving the validity of the state law claims,
which it held could potentially be inconsistent with FCIA or FCIC’s regulations. Reimer, 2001 WL 1820379,
at *3 n.3.
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short, the Court has extensively reviewed the regulations cited by Great
American and nowhere in its review does the Court ascertain an intent to
completely preempt state court causes of action. “Complete preemption” is a
recognized term of art, see Meyer, 162 F.3d at 1268 n. 2, yet the regulations
do not employ this term. Neither do the regulations refer to “exclusive federal
jurisdiction.” In fact, the Court has not located, nor has Great American
pointed to, any regulation setting out a general jurisdictional provision. Rather,
at least two regulations elude to state court jurisdiction. First, § 400.352(b)(4)
provides that “nothing herein is intended to preclude any action on the part of
any authorized State regulatory body or any State court or any other authorized
entity concerning any actions or inactions on the part of the agent, company,
or employee ... whose action or inaction is not authorized or required under the
[FCIA].” 7 C.F.R. § 400.352(b)(4). Second, § 400 .176(b) provides that a
plaintiff may establish liability, under certain circumstances, in “a court of
competent jurisdiction.” Id. § 400.176(b). North Dakota district courts are
courts of general jurisdiction, and thus competent. N.D. Cent.Code §
27–05–06. See also Alumax Mill Prod., Inc. v. Congress Fin. Corp., 912 F.2d
996, 1002 (8th Cir.1990) (state courts have general jurisdiction). In light of
this language and absent any language clearly expressing an intent to
completely preempt state court causes of action, the Court concludes that
removal was improper. See Magee, 135 F.3d at 602 (noting that Congress’
intent to make a cause of action pleaded under state law removable to federal
court must be clearly manifested).
Id. at *4-5.11
In Agre v. Rain & Hail, LLC, 196 F. Supp. 2d 905, 907 (D. Minn. 2002), several sugar
beet growers filed state court actions against their crop insurers for failure to pay claims
stemming from frost damage and for violations of the Minnesota Prevention of Consumer
Fraud Act. The action was removed to the federal district court by the defendant insurers. Id.
Like the federal district court in Reimers, the district court in Agre also addressed the issue
of complete preemption in determining whether it had jurisdiction to entertain the actions.
Id. at 910. The defendants focused primarily on the regulations promulgated by the FCIC.
Id. The court, however, rejected the defendants’ argument regarding complete federal
preemption stating “[t]he simple fact that Congress has established an ordered regulatory
scheme is insufficient to preempt all contract claims involving crop insurance.” Id. at 911
(citing Marcus v. AT&T Corp., 138 F.3d 46, 54 (2d Cir. 1998)). The court specifically
11
The court noted that section 1506(1) of Title 7 of the United States Code provides the FCIC with
the power to preempt state and local rules through its regulations. Id. at *5 (citing Meyer, 162 F.3d at 1268).
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addressed 7 C.F.R. § 400.352(a) and 7 C.F.R. § 400.176, which it found “strongly suggest
a willingness to allow state proceedings rather than preempting them.” Id. at 912. Thus, the
court held that “[i]n the face of this language, the Court is unconvinced that the FCIC
regulatory text demonstrates congressional intent to preclude concurrent jurisdiction.” Id.
The above authorities support the conclusion that the FCIA and the regulations
promulgated by the FCIC under the authority of the FCIA leave open the door for certain
state law actions. Significantly, however, the above quoted authorities were decided prior to
changes in the regulations. Additionally, several of the authorities address the issue of
complete preemption, but do not address regular preemption, with the federal courts noting
this would be an issue to be raised defensively in the state court actions. See Reimer, 2001
WL 1820379, at *3 n.3 . Defendants assert that changes in the regulation make this action
distinguishable from that in Nobles and supports a finding that all state law claims are now
preempted by the federal regulations. Thus, we turn to the current FCIC regulations.
II. Current Regulations and their Application to this Action
Our research revealed limited authority on the issue of preemption under current
federal regulations. We do however find some guidance in a recent decision, Skymont Farms
v. North, No. 4:09-CV-77, 2012 WL 996619, at *1 (E.D. Tenn. Mar. 22, 2012). In Skymont
Farms, the owner of several nurseries filed suit against its insurance company following the
denial of its claims for coverage following a hail storm. Id. The insured alleged the insurers
were “negligent in failing to obtain an insurance policy for Skymont Farms, were negligent
in obtaining proper information from Plaintiffs to secure appropriate coverage, made
misrepresentations regarding the procurement of such coverage upon which Plaintiffs relied,
and breached their duties and contractual obligations to Plaintiffs.” Id. The action was
originally filed in Tennessee circuit court, but was removed to the federal district court on
the basis of federal question jurisdiction. Id. In determining whether the district court had
jurisdiction to hear the action, it addressed the issue of complete federal preemption. Id. at
*6. The court adopted the holding of several district courts in ruling that the FCIA does not
completely preempt the field of crop insurance. Id. at *6. In making its decision, the court
looked to the decisions in Agre and Reimers discussed at length above. Id. at *6-7.
The court further addressed the effect of the regulations promulgated by the FCIC in
a footnote:
“Inclusion of one thing indicates exclusion of the other.” Agre, 196 F.Supp.2d
at 912 n.8. The Agre court also looked to two regulations, 7 C.F.R. §
400.352(a) and § 400.176, but these sections have changed from what they
stated in 2002 when Agre was decided, rendering them slightly less applicable
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to the current analysis. See also Reimers, 2001 WL 1820379, at *5 (discussing
the same regulations). Section 400.352 prohibits various kinds of state action
to promulgate rules and regulations that would affect crop insurance policies,
and the specific references to cases in state court have been eliminated. Section
400.176 prohibits policyholders from seeking reimbursement from a state fund
or program for their crop insurance losses and restricts allowable damages
against insurance companies. Although these regulations do not provide the
obvious support against complete preemption outlined in Agre, it does not
follow from these specific preemptions that the entire rubric of state law
claims and state court actions against the private insurance companies or
insurance agents would be excluded. Indeed, the inclusion of the restrictions
in § 400.176(b) in a section entitled “state action preemptions” would seem to
imply that such actions against an insurance company would take place in state
court and the available damages would be accordingly limited. As the Reimers
court noted, this type of preemption is not relevant to the complete preemption
inquiry because it is defensive, or simple, preemption. 2001 WL 1820379, at
*5. Furthermore, as noted above, even if these regulations contained language
to suggest complete preemption, a federal regulation does not carry the weight
of a statute in a complete preemption analysis.
Id. at *6 n.6.
Under the previous version of the provision, the court in Ledford Farms held that the
arbitration provision was not a complete bar to state law claims, but a condition precedent
that must be satisfied prior to the filing of a state law action when the language of the
provision stated that if the parties failed to agree on any “factual determination” then the
matter would go to arbitration. Ledford Farms, 184 F. Supp. 2d at 1245. However, the
language in the current arbitration provision, codified at 7 C.F.R. § 457.8, now refers to “any
determination” and § 457.8(a)(1) states that “[a]ll disputes involving determinations made
by us . . . are subject to mediation or arbitration.”12 Defendants argue that this language
requires that all disagreements with the insurer must be resolved through arbitration.
Defendants suggest that further support for their position that the terms of the policy
control over “conflicting state law” is found in the current language of 7 C.F.R. § 400.352,
entitled “State and local laws and regulations preempted”:
(a) No State or local governmental body or non-governmental body shall have
12
The regulation requires mediation or arbitration except for those specified in section 20(d) or (e),
which are not applicable in this action. 7 C.F.R. § 457.8(a)(1).
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the authority to promulgate rules or regulations, pass laws, or issue policies or
decisions that directly or indirectly affect or govern agreements, contracts, or
actions authorized by this part unless such authority is specifically authorized
by this part or by the Corporation.
(b) The following is a non-inclusive list of examples of actions that State or
local governmental entities or non-governmental entities are specifically
prohibited from against the Corporation or any party that is acting pursuant to
this part. Such entities may not:
(1) Impose or enforce liens, garnishments, or other similar
actions against proceeds obtained, or payments issued in
accordance with the Federal Crop Insurance Act, these
regulations, or contracts or agreements entered into pursuant to
these regulations;
(2) Tax premiums associated with policies issued hereunder;
(3) Exercise approval authority over policies issued;
(4) Levy fines, judgments, punitive damages, compensatory
damages, or judgments for attorney fees or other costs against
companies, employees of companies including agents and loss
adjusters, or Federal employees arising out of actions or
inactions on the part of such individuals or entities authorized or
required under the Federal Crop Insurance Act, the regulations,
any contract or agreement authorized by the Federal Crop
Insurance Act or by regulations, or procedures issued by the
Corporation (Nothing herein precludes such damages being
imposed against the company if a determination is obtained
from the FCIC that the company, its employee, agent or loss
adjuster failed to comply with the terms of the policy or
procedures issued by FCIC and such failure resulted in the
insured receiving a payment in an amount that is less than the
amount to which the insured was entitled); or
(5) Assess any tax, fee, or amount for the funding or
maintenance of any State or local insolvency pool or other
similar fund.
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The preceding list does not limit the scope or meaning of paragraph (a) of this
section.
7 C.F.R. § 400.352 (2005).
Defendants also point to 7 C.F.R. § 400.176 (2005) entitled “State action
preemptions,” which states:
(a) No policyholder shall have recourse to any state guaranty fund or similar
state administered program for crop or premium losses reinsured under such
Standard Reinsurance Agreement. No assessments for such State funds or
programs shall be computed or levied on companies for or on account of any
premiums payable on policies of Multiple Peril Crop Insurance reinsured by
the Corporation.
(b) No policy of insurance reinsured by the Corporation and no claim,
settlement, or adjustment action with respect to any such policy shall provide
a basis for a claim of punitive or compensatory damages or an award of
attorney fees or other costs against the Company issuing such policy, unless a
determination is obtained from the Corporation that the Company, its
employee, agent or loss adjuster failed to comply with the terms of the policy
or procedures issued by the Corporation and such failure resulted in the
insured receiving a payment in an amount that is less than the amount to which
the insured was entitled.
We, however, disagree with Defendants’ assertions that the arbitration provision and
federal regulations completely eclipse the entirety of state law claims. The current form of
the regulations quoted above reveal no conflict with state law claims for negligence,
misrepresentation, or fraud. The language of the arbitration provision refers to disagreements
over “determinations” made by the insurer presumably in accordance with the FCIA and
FCIC regulations; however, misrepresentations regarding the policy or the applicability of
a policy to a crop are distinguishable from a determination regarding the policy language and
coverage under the policy. As Skymont Farms recognized, some state law claims appear to
have been preempted and recoverable damages limited based upon the current language in
7 C.F.R. § § 400.352 and 400.176. Skymont Farms, 2012 WL 996619, at *6 n.6. Specifically,
it appears that the current language of the arbitration provision and these two regulations
would bar a breach of contract action as that would be based upon a “determination” by the
corporation and would fall within the prohibitions contained in the above regulations.
However, claims for negligence or misrepresentation do not conflict with these provisions.
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“Preemption occurs when there is an outright or actual conflict between federal and
state law.” BellSouth Telecommunications, Inc. v. Greer, 972 S.W.2d 663, 670 (Tenn. Ct.
App. 1997) (citing Freightliner Corp. v. Myrick, 514 U.S. 280, 287 (1995); Louisiana Pub.
Serv. Comm’n v. F.C.C., 476 U.S. at 368 (1986)). Preemption can also occur “by implication
when compliance with both federal and state law is impossible or when state law obstructs
the accomplishment of Congress’s objectives.” Id. (citing Boggs v. Boggs, 520 U.S. 833(1997); CSX Transp., Inc. v. Easterwood, 507 U.S. 658, 663 (1993); California Fed. Sav. &
Loan Ass’n. Guerra, 479 U.S. 272, 281 (1987)). It can also arise when Congress’s legislation
is “so pervasive that it leaves no room for state legislative action.” Id. (citing Cipollone v.
Liggett Group, Inc., 505 U.S. 504, 516 (1992); Louisiana Pub. Serv. Comm’n v. F.C.C., 476
U.S. at 368). Our courts should begin their inquiry with the presumption that Congress did
not intend to preempt state law. Id. at 671. (citing Building & Constr. Trades Council v.
Associated Builders & Contractors of Massachusetts/Rhode Island, Inc., 507 U.S. at 224
(1993)). The proper approach is to reconcile the federal and state laws, rather than to seek
out conflict where none clearly exists. Id. (citing Merrill Lynch, Pierce, Fenner & Smith,
Inc. v. Ware, 414 U.S. 117 (1973); Exxon Corp. v. Governor of Maryland, 437 U.S. at 130
(1978)). “State law should be displaced by federal law only to the extent there is a conflict.”
Id. (citing Dalton v. Little Rock Family Planning Servs., 516 U.S. 474, 475–77 (1996)).
7 C.F.R. § 400.176 prohibits claims whose basis is the policy of insurance without a
prior determination by the FCIC that there was a failure to comply with the terms of the
policy and such failure resulted in the insured receiving a payment less than the amount the
insured was entitled. However, state tort claims for negligence, misrepresentation, and fraud
do not arise from the policy of insurance itself but from alleged tortious actions taken prior
to the agreement being made or that occur outside the scope of the policy.
7 C.F.R. § 400.352 prohibits judgments or damages “arising out of actions or inactions
. . . authorized or required under the [FCIA], the regulations, any contract or agreement
authorized by the [FCIA], or by regulations, or procedures issued by [the FCIC].” As the
court in Nobles recognized, misrepresentations are not actions or inactions “required or
authorized” under the FCIA, federal regulations, or the policy provisions. Nobles, 303 F.
Supp. 2d at 1297 (recognizing that “the key act underlying [plaintiffs’] fraud claim, for
example, is not [defendant’s] denial of their insurance coverage, but is instead [defendant’s]
act of telling them their land was insurable,” which was a misrepresentation).
Thus, as noted in Skymont Farms, “it does not follow from these specific exemptions
that the entire rubric of state law claims and state court actions against the private insurance
companies or insurance agents would be excluded.” Skymont Farms, 2012 WL 996619, at
*6 n.6. Keeping in mind that state law should only be displaced by federal law when there
is a conflict, we find that Plants’ state law claims for negligent misrepresentation and
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negligence are not preempted by federal law. BellSouth Telecommunications, Inc., 972
S.W.2d at 670 (citing Dalton, 516 U.S. at 475–77). Based upon the language in the federal
regulations, however, we hold that the claims for breach of contract, breach of the duty of
care, and statutory bad faith pursuant to Tennessee Code Annotated § 56-7-105 are
preempted for they pertain to actions or inactions “required or authorized” under the FCIA,
federal regulations, or the policy provisions.13
IV. Collateral Estoppel and Res Judicata
Having found that two of the state law claims asserted by Plants were not covered by
the arbitration provision and that the state law claims were not preempted by the federal
regulations, we must address the last issue: whether any of the surviving state law claims,
negligence and negligent misrepresentation, asserted by Plants were barred by the doctrines
of collateral estoppel and res judicata based upon the arbitration proceedings.
“‘Under Tennessee law . . . the doctrine of ‘collateral estoppel’ operates to bar a
second suit between the same parties and their privies on a different cause of action only as
to issues which were actually litigated and determined in the former suit.”’ Cain Field
Nursery v. Farmers Crop Ins. Alliance, Inc., No. 4:09–cv–78, 2010 WL 3781760, at *7 (D.C.
E.D. Sept. 21, 2010) (quoting Smith v. Dawson-Smith, 111 F. App’x 360, 362 (6th Cir. 2004)
(citing Richardson v. Tenn. Bd. of Dentistry, 913 S.W.2d 446, 459 (Tenn. 1995))). In
Tennessee, “finding[s] made by an arbitrator have the same binding effect as judicial
determinations made by a court.” Id. (citing Turpin v. Love, 1973 WL 16997, at *4 (Tenn.
Ct. App. Aug. 14, 1973); Bright v. Spaghetti Warehouse, Inc., 1998 WL 205757 (Tenn. Ct.
App. Apr. 29, 1998)).
When determining whether collateral estoppel applies to an action, the court should
consider the following factors:
(1) whether the issues in the prior proceeding were the same as those raised in
the present action; (2) whether the prior proceeding resulted in judgment on
the merits; (3) whether the party in the present action was a party or in privity
with a party to the prior action; and (4) whether there was full and fair
opportunity to litigate the issue in the prior proceeding.
Id. (citing Morris v. Esmark Apparel, Inc., 832 S.W.2d 563 (Tenn. Ct. App. 1991)).
13
Tennessee Code Annotated § 56-7-105 sets forth a cause of action for bad faith refusal to honor
a policy and thus is derivative of a determination regarding the policy itself and thus is preempted by the
federal provisions.
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The doctrine of res judicata is defined as a “[r]ule that a final judgment rendered by
a court of competent jurisdiction on the merits is conclusive as to the rights of the parties and
their privies, and, as to them, constitutes an absolute bar to a subsequent action involving the
same claim, demand or cause of action. . . . [T]o be applicable, it requires identity of cause
of action, or person and parties to action, and of quality in persons for or against whom claim
is made.” Richardson, 913 S.W.2d at 459 (citing Black’s Law Dictionary 1172 (5th ed.
1979)). Res judicata “bars a second suit between the same parties or their privies on the same
cause of action with respect to all issues which were or could have been litigated in the
former suit.” Id. (quoting Goeke v. Woods, 777 S.W.2d 347, 349 (Tenn.1989) (quoting
Massengill v. Scott, 738 S.W.2d 629, 631 (Tenn.1987))).
We do not have the full record from the arbitration, however, it is clear from the
Arbitrator’s Award that the arbitrator only considered the state law claims in the context of
reforming the insurance policy and the arbitrator rejected this claim based on federal
preemption. Because the arbitrator’s position was that federal law preempted any state law
claims, the arbitrator did not consider the merits of Plants’ state law claims regarding
negligence or negligent misrepresentation (except to evaluate them in the context of whether
RCIS failed to comply with FCIC procedures). Further, Plants’ claims of misrepresentations
and negligence on the part of agents of Defendants was not considered by the arbitrator.
Therefore, we find that the trial court erred in dismissing Plants’ claims for negligence and
negligent misrepresentation based upon the doctrines of collateral estoppel and res judicata.
V. RCIC AS A PARTY TO THE ACTION
Lastly, Defendants argue that RCIC was not a party to the insurance contract, RCIC
had no involvement in the events at issue, and the trial court should have dismissed RCIC
from this action. Defendants filed a motion for summary judgment to have RCIC dismissed,
asserting that RCIC is a wholly-owned subsidiary of RCIS and it had no involvement in the
issuance or servicing of the MPCI policy. In response, Plants stated that it was unfamiliar
with the corporate structure of Defendants and could not respond without additional
information. The trial court did not address this issue in its order dismissing Defendants. We
decline to make a ruling on this issue without the trial court doing so first and remand this
issue for the trial court to address.
I N C ONCLUSION
We affirm the dismissal of Plants’ claims for breach of contract, breach of the duty
of care, and statutory bad faith pursuant to Tennessee Code Annotated § 56-7-105.
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We reverse the dismissal of Plants’ claims for negligent misrepresentation and
negligence.
This matter is remanded to the trial court for further proceedings consistent with this
opinion and one-half of the costs of appeal are assessed against the appellant and one-half
against the appellees.
______________________________
FRANK G. CLEMENT, JR., JUDGE
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