Opinion
1:99cv43-C
July 9, 1999
MEMORANDUM AND RECOMMENDATION
THIS MATTER is before the court upon defendant's Motion to Dismiss and/or for Summary Judgment. Having carefully considered defendant's Motion to Dismiss and/or for Summary Judgment, reviewed the pleadings, and conducted a hearing, the undersigned enters the following findings, conclusions, and recommendation.
FINDINGS AND CONCLUSIONS
I. Background
Defendant has moved for dismissal pursuant to Rule 12(b), Federal Rules of Civil Procedure, contending that plaintiff has failed to state a cognizable claim. Rule 12(b) authorizes dismissal based upon a dispositive issue of law. Neitzke v. Williams, 490 U.S. 319, 109 S.Ct. 1827, 1832 (1989); Hishon v. King Spalding, 467 U.S. 69, 73 (1984);Conley v. Gibson, 355 U.S. 41 (1957). As the Court discussed in Neitzke:
This procedure [for dismissal], operating on the assumption that the factual allegations in the complaint are true, streamlines litigation by dispensing with needless discovery and fact finding. Nothing in Rule 12(b)(6) confines its sweep to claims of law which are obviously insupportable. On the contrary, if as a matter of law "it is clear that no relief could be granted under any set of facts. . . a claim must be dismissed, without regard to whether it is based on outlandish legal theory. . . . What Rule 12(b)(6) does not countenance are dismissals based on a judge's disbelief of a complaint's factual allegations."Id., 109 S.Ct. at 1832 (citation omitted). For the limited purpose of making a recommendation as to disposition of defendants' motion, the court has accepted as true the facts alleged by plaintiffs in the complaint and viewed them in a light most favorable to plaintiffs.
This action was originally filed in the North Carolina General Court of Justice in Haywood County. Defendant removed the action based upon complete diversity and an amount in controversy exceeding $75,000. 28 U.S.C. § 1332.
Plaintiffs allege in their complaint that defendant, an Illinois insurance company authorized to do business in North Carolina, has improperly assessed "fault" to them based upon an automobile accident as to which there was no judicial finding of fault. Defendant is plaintiffs' automotive insurer.
It is undisputed that defendant's assignment of fault was made in accordance with Chapter 58 of the North Carolina General Statutes, which provides for a "Safe Driver Incentive Plan" ("SDIP") and authorizes the actions taken. Specifically, the statute provides that insurers may assign "insurance points" to drivers based upon accidents as to which there has been no judicial determination of fault, but where the insurance carrier has determined that the insured was at fault. These "insurance points" are carried by the insured if he or she decides to go with a new insurance provider. The defendant does not dispute that the state law provides insurance companies the opportunity to recover costs of accidents, and plaintiffs do not dispute that the purported state purpose behind the law is to provide an incentive to drivers to remain accident free. Plaintiffs contend that they are not concerned with the rate charged, but only with what they perceive as a delegation of judicial function by the North Carolina Legislature violative of the North Carolina Constitution.
The facts upon which plaintiffs' standing is built involves an automobile accident in which defendant paid sums for property damage. Although the accident never resulted in a judicial finding of fault in criminal or civil court, defendant took away plaintiffs' "safe driver discount" and imposed a premium surcharge. There is no allegation that defendant acted contrary to state law or acted in a manner that was any different than other insurance carriers providing insurance products in North Carolina. The only allegation is that by complying with such law, defendant has exercised judicial power which plaintiffs contend was unlawfully delegated to the insurance industry in violation of the North Carolina Constitution. No claim under 42, United States Code, Section 1983 has been asserted.
In addition to their individual claims, plaintiffs seek certification of a class of insureds, reimbursement of surcharges, injunctive and other equitable relief restricting the imposition of increased premiums, and a declaration that the SDIP violates both Article IV, Section 1 and Article I, Section 19, of the North Carolina Constitution. While the putative class would encompass all North Carolina drivers insured by defendant who have had their "safe driver discount" removed without a judicial finding of fault, plaintiffs indicated at the hearing that they may attempt to broaden the class of plaintiffs through joinder of all other insurance carriers in North Carolina. While ultimately not germane to the decision below, the court notes that many insurers are corporate residents of North Carolina, and their joinder would defeat diversity.
It is plaintiffs' contention that this action seeks to have a state law declared violative of the state constitution, but the State of North Carolina and its Attorney General, who is charged with defending from constitutional attack laws passed by the state legislature, have not been joined by any of the existing parties. Further, although plaintiffs argue that it is the state's allegedly unconstitutional delegation of judicial function to the insurance industry that they seek to rectify, they also contend that they have no grounds for bringing suit against the North Carolina Department of Insurance, its Commissioner, or, eo nominee, the State of North Carolina. Before reaching the substantive question of Rule 12(b)(6) dismissal, this court must first consider whether it has jurisdiction and whether, if such jurisdiction exists, it is appropriate to exercise it in this particular case. Such issues were not raised by the parties, but by the court at the time of the hearing.
Despite plaintiffs' and defendant's satisfaction with this forum, this court has an affirmative duty to determine early whether jurisdiction exists. State v. Ivory, 906 F.2d 999, 1000 n. 1 (4th Cir. 1990). As outlined below, a civil action in which the only issue is whether a state regulatory law violates a state constitution, brought to federal court through its diversity jurisdiction, not only raises the jurisdictional question, but requires this court to consider statutory comity, common law comity, and, ultimately, the doctrine of abstention.
II. Jurisdiction
A. Introduction
Defendant asserts that jurisdiction exists under 28, United States Code, Section l332. In support, defendant has alleged by way of affidavit that it is an Illinois corporation and that the amount in controversy well exceeds the jurisdictional minimum when impact on the defendant's operations is taken into account.
B. First Prong: Complete Diversity
At the time of removal — the snapshot in time in which diversity is viewed — complete diversity existed. If at some time in the future plaintiffs were to request that other insurers be joined, such motion would have to be denied, as it would defeat diversity at that time. At present, defendant is a resident of the State of Illinois, having its principal place of business in Northbrook. Plaintiffs are residents of the State of North Carolina.
Section 1332(c)(1) provides, however, that in certain circumstances, an insurance company will be deemed to be a resident of the state of the insured where the insured is not a named defendant. In this case, the insured is not named as a defendant. The term is not defined by Congress, but the provision is applicable only in "direct actions." While there is a split among the decisions, the greater weight appears to interpret such provision as applying only to common or civil law tort claims where federal jurisdiction is manufactured through state laws which allow a plaintiff to sue the insurance company of an insured directly, rather than suing the insured tortfeasor. These "direct action" provisions of state law have resulted in a flood of federal litigation under diversity which is not truly diverse. See Searles v. Cincinnati Ins, Co., 998 F.2d 728 (9th Cir. 1993). At the time of removal, therefore, complete diversity existed.
C. Amount In Controversy
In order to reach the jurisdictional threshold of a sum or value "in excess of $75,000," defendant has not relied upon the potential recovery of the plaintiffs or the aggregate potential recovery of the putative class, but upon the greater "costs attributable" to the litigation. Defendant alleges that if the relief sought were granted, it would incur costs attributable to "modification of Allstate's multiple computer systems . . . [which] would currently require over 5,500 hours of programming labor at an expense of over $410,000." Notice of Removal, at 5. Defendant cites Hoffman v. Vulcan Materials Co., 19 F. Supp.2d 475 (M.D.N.C. 1998), in support of its reliance upon potential pecuniary loss attributable to the litigation.
A jurisdictional amount has been the second prong of diversity jurisdiction since the Judiciary Act of 1789 — 1 Stat. 73, 79 (Sept. 24, 1789). In determining whether the jurisdictional amount was met in a case removed to federal court, the Supreme Court held in Saint Paul Mercury Indemnity Co. v. Red Cab Co., 303 U.S. 283 (1938), as follows:
There is a strong presumption that the plaintiff has not claimed a large amount in order to confer jurisdiction on a federal court or that the parties have colluded to that end. . . . Moreover, the status of the case as disclosed by the plaintiff's complaint is controlling in the case of a removal, since the defendant must file his petition before the time for answer or forever lose his right to remove, of course, if, upon the face of the complaint, it is obvious that the suit cannot involve the necessary amount, removal will be futile and remand will follow. But the fact that it appears from the face of the complaint that the defendant has a valid defense, if asserted, to all or a portion of the claim, or the circumstance that the rulings of the district court after removal reduce the amount recoverable below the jurisdictional requirement, will not justify remand.Id., at 290-92 (footnotes omitted). While comity with state courts demands that a federal court presume that a jurisdictional amount is not met, the court must look to the face of the complaint, as filed in the state court, to determine whether the jurisdictional amount has been met.
The face of the complaint specifies no amount, and it would only be reasonable to infer that these plaintiffs could recover a few hundred to a few thousand dollars. The Court of Appeals for the Fourth Circuit has held, however, that the amount in controversy is measured by the pecuniary result to either the plaintiffs or the defendant. Government Employees Ins. Co. v. Lally, 327 F.2d 568, 569 (4th Cir. 1964). The undersigned has found pertinent a decision of the Court of Appeals for the Third Circuit which stated that "the amount in controversy is not measured by the low end of an open-ended claim, but rather by a reasonable reading of the value of the rights being litigated." Angus v. Shiley. Inc., 989 F.2d 142, 146 (3rd Cir. 1993). Even though the individual plaintiffs seek damages which may vary between nominal and substantial, it is reasonable to conclude that the "pecuniary result" to defendant, even if a class is not certified, could well exceed the jurisdictional minimum. That is so because a declaration of unconstitutionality could, conceivably, result in nominal retrospective damages to these plaintiffs, prospective lost revenues from insureds statewide, and increased administrative costs which may well reasonably exceed $75,000. It appearing that the amount in controversy exceeds $75,000, the second prong of the test is satisfied.
Jurisdiction is properly laid in this court under Section 1332. The court will now consider whether it is appropriate to exercise such jurisdiction in this case.
III. Abstention: Federal Court Interference With State Interests
A. Introduction
This court does not lightly consider foregoing the exercise of its jurisdiction. The duty of federal courts to exercise the jurisdiction which they possess is unequivocal. "When a Federal court is properly appealed to in a case over which it has by law jurisdiction, it is its duty to take such jurisdiction . . . ." Willcox v. Consolidated Gas Co., 212 U.S. 19, 40 (1909). Federal courts have recognized the obligatory nature of their jurisdiction from the inception of the Republic:
We have no more right to decline the exercise of jurisdiction which is given than to usurp that which is not given. The one or the other would be treason to the Constitution.Cohens v. Virginia, 19 U.S. (6 Wheat.) 264, 404 (1821).
It is equally clear, however, that the doctrine of comity requires a federal court to restrain its exercise of diversity jurisdiction where it is called upon to resolve difficult questions of state law that involve state administrative agencies and concern matters of substantial public concern and where the parties have an adequate remedy in state courts. This is especially clear where the court's jurisdiction rests completely on diversity and no federal claims are raised. While abstention is "the exception, not the rule, and can only be justified in exceptional cases,"Neufield v. City of Baltimore, 964 F.2d 347, 349 (4th Cir. 1992), the undersigned finds, for the reasons discussed below, that this is just such an exceptional case, despite the satisfaction of the parties with this forum.
B. Statutory Comity: The "Johnson Act" — 28, United States Code, Section 1342
Having found that the threshold requirements of diversity have been satisfied, the court must next determine whether statutory comity would disallow federal jurisdiction over this action. Section 1342 provides, as follows:
The district courts shall not enjoin, suspend or restrain the operation of, or compliance with, any order affecting rates chargeable by a public utility and made by a State administrative agency or a rate making body of a State political subdivision, where:
(1) Jurisdiction is based solely on diversity of citizenship . . .; and
(2) The order does not interfere with interstate commerce; and,
(3) The order has been made after reasonable notice and hearing; and
(4) A plain, speedy and efficient remedy may be had in the courts of such State.Id. (emphasis added).
The first issue is whether an insurance company is a "public utility" within the meaning of Section 1342. The court can find no cases defining whether insurance companies, whose rates and operations within a particular state are wholly regulated by a state rate-making body, are considered to be public utilities. The legislative intent behind Section 1342 must, therefore, be considered. In Swift Co. v. Wickham, 382 U.S. 111, 127 (1965), the Supreme Court held, as follows:
[In enacting Section 1342, Congress's] ire was arouse[d] by the frequent grants of injunctions against the enforcement of progressive state regulatory legislation . . . In contrast, a case involving an alleged incompatibility between state and federal statutes . . . involves more confining legal analysis and can hardly be thought to raise the worrisome possibilities that economic or political predilections will find their way into a judgment.
This action squarely fits within the substantive bounds of Section 1342, inasmuch as plaintiffs seek to "enjoin . . . the operation of, or compliance with, any order affecting rates chargeable" where "jurisdiction is based solely on diversity of citizenship . . . ." and a" plain, speedy and efficient remedy may be had in the courts of such State." 28 U.S.C. § 1342 (1) (4).
An argument could be made that the automotive insurance industry, which is wholly regulated by state agencies and whose products are required to maintain a vehicle in the state, is, for the purposes of Section 1342, a "public utility." Where the importance of a federal court exercising its jurisdiction is combined with a lack of definitive case law, the undersigned will decline to extend to this case statutory comity under Section 1342.
C. Burford Abstention
In addition to codified comity, several common law doctrines of abstention are well developed under federal common law. Among those doctrines are Colorado River abstention, Pullman abstention, and Burford abstention. Neither Colorado River nor Pullman appears to have any application to this diversity case; however, Burford provides that a federal court should not interfere with complex state regulatory schemes in cases involving (1) difficult state-law questions bearing on policy problems of substantial public import or (2) efforts to establish coherent state policy on matters of substantial public concern where state courts afford expeditious and adequate judicial review of impartial administrative determinations. Burford v. Sun Oil Co., 319 U.S. 315 (1943); see New Orleans Pub. Serv., Inc. v. Council of New Orleans, 491 U.S. 350 (1989); Neufield v. City of Baltimore, 964 F.2d 347 (4th Cir. 1992); Front Royal Warren County Indus. Park Corp. v. Town of Front Royal, 945 F.2d 760 (4th Cir. 1991), cert. denied, 60 U.S.L.W. 3652 (U.S. 1992). When determining whether to abstain under Burford, the "`presence of federal-law issues must always be a major consideration weighing against surrender.'" Kruse v. Snowshoe Co., 715 F.2d 120, 124 (4th Cir. 1983) (citation omitted). In this case, there are no issues of federal law presented.
The Court of Appeals for the Fourth Circuit, in addressing the interplay between the pull of exercising jurisdiction and the tug ofBurford abstention, has held, as follows:
[T]here are . . . certain limited circumstances in which this "`virtually unflagging obligation'" is averted in order to prevent unwarranted federal interference in state interests.
In Burford, the Sun Oil Company instituted a federal action challenging the decision of the Texas Railroad Commission to allow Burford drilling rights on a small plot of land in an East Texas oil field. The permits were issued under a complicated regulatory system established under Texas law in furtherance of that State's substantial policies and interests in the conservation of its oil and gas resources. Because "[d]elay, misunderstanding of local law, and needless federal conflict with the State policy, are the inevitable product of [the] double system of review" created by the exercise of federal jurisdiction, the Court concluded that "a sound respect for the independence of state action requires the federal equity court to stay its hand."
The Supreme Court has recently "distilled" the doctrine represented by the Burford decision into the following formulation:
Where timely and adequate state-court review is available, a federal court sitting in equity must decline to interfere with the proceedings or orders of state administrative agencies: (1) when there are "difficult questions of state law bearing on policy problems of substantial public import whose importance transcends the result in the case then at bar"; or (2) where the "exercise of federal review of the question in a case and in similar cases would be disruptive of state efforts to establish a coherent policy with respect to a matter of substantial public concern."Sugarloaf Citizens Assoc. v. Montgomery County, Maryland, 33 F.3d 52, 1994 WL 447442, pages 2-3 (4th Cir. 1994)(u.p.; copy placed in court file; citations and footnotes omitted).
Applying the analysis prescribed by the Supreme Court and the Court of Appeals for the Fourth Circuit, it appears that this court should also stay its hand. Unlike a number of Burford cases which involved an admixture of claims under federal and state law, the claims removed to this court under diversity jurisdiction are purely questions of state law. Not only is the removed issue an exclusive matter of state law, it is specifically an issue of whether a most complex state regulatory scheme, undoubtably enacted to establish a coherent policy with respect to a matter of substantial public concern, violates the state constitution. Clearly, the statute at issue was enacted to provide North Carolina motorists with an "incentive," albeit it a negative one, for driving in a safe manner, thereby furthering the legitimate state interest of public health and welfare. There is no doubt that a North Carolina federal court is quite competent to determine whether a state law violates the state constitution. Comity requires this court to look beyond competence and jurisdiction to determine whether federal judicial review is appropriate. Had plaintiffs framed their complaint as a violation of federal rights as well as state constitutional rights, the question may have been closer.
The court finds that the North Carolina statutory scheme presents "difficult questions of state law bearing on policy problems of substantial public import" which transcend the result in this particular case, and that the "exercise of federal review" would be disruptive of state efforts to establish a coherent policy with respect to a matter of substantial public concern, i.e., regulation of the insurance industry and the protection of the public health and welfare through encouragement of safe driving.
Plaintiffs are entitled to air their grievances in a court of law. The undersigned finds, however, that where federal jurisdiction is founded only upon diversity, it would be inappropriate for a federal court to determine whether a complex state regulatory scheme of great concern to the citizens of North Carolina violates the North Carolina Constitution.
The appellate court in Sugarloaf went further and cautioned that theBurford abstention cannot rest merely upon the existence of a complex regulatory scheme.
Of course, it is true that the mere presence of a complex state or local regulatory scheme does not mandate abstention. Similarly, "a final appeal to a central administrative court with special expertise and jurisdiction to decide only certain kinds of cases is not an absolute prerequisite for the application of Burford abstention." In this case, however, we find that Maryland's "complex state regulatory scheme" satisfies Burford by providing "impartial and fair administrative determinations subject to expeditious and adequate judicial review" in these "important matters of state policy." The exercise of federal jurisdiction over MDE's permitting decisions would disrupt Maryland's complex statutory scheme and frustrate the State's efforts to establish a coherent environmental policy, thereby warranting Burford abstention under the second prong of NOPSI as well.Id. This case is not unlike Sugarloaf. Defendant, in the context of its Rule 12(b)(6) motion, contends that North Carolina has provided plaintiffs with an adequate and effective remedy in state court. Defendant outlines the extensive administrative and judicial review process available to plaintiffs at pages 16 through 18 of its supporting brief. Plaintiffs respond in their brief, as follows:
[T]he Department of Insurance has taken no action that Plaintiffs can challenge. Plaintiffs' complaint is not with the SDIP or even with the rates promulgated under the plan that the Commissioner of Insurance may have approved. . . . Rather plaintiffs' challenge is to the legislation which purports to permit non- judicial , nonadministrative determinations of fault by a private fact finder with no constitutional authority.
Whether a North Carolina court would entertain the constitutional claim, require that plaintiffs first exhaust their administrative remedies, or require that they otherwise reform the complaint are issues not necessary to resolve in determining whether to abstain. The key element is that a federal court has been presented with a state-law challenge to a complex state administrative scheme that concerns an important issue of public concern to the citizens of North Carolina. While plaintiffs argue that they do not have standing to bring an action before the Commissioner, it appears to this court (for the reasons discussed below in the alternative findings concerning plaintiffs' Motion to Dismiss) that plaintiffs must first exhaust their administrative remedies by filing and pursing an action before the Department of Insurance. It is clear from the statute and the "Administrative Procedures Act" that the State of North Carolina has in place a mechanism for considering grievances such as those presented by plaintiffs. The state remedy requires, first, administrative review before a majority of the insurance commission or before an administrative law judge; further review of the final administrative decision by the North Carolina General Court of Justice, Superior Court Division, in Wake County; and, finally, review before the North Carolina Court of Appeals. Burford abstention is particularly appropriate where a state chooses to concentrate suits relating to a particular regulatory scheme in one county, thereby providing for specialized and uniform adjudication. Sugarloaf, supra; Isthmus Landowners Assoc. v. California, 601 F.2d 1087 (9th Cir. 1979).
Assuming that one of these parties is right as to the method of review, the State of North Carolina has provided for expeditious and adequate judicial review, either through exhaustion of administrative remedies followed by judicial review in a centralized court, or through civil action that begins and ends in civil court.
Inasmuch as this action concerns solely whether a state law violates the state constitution and involves a complex state regulatory scheme of great concern to the citizens of North Carolina for which the state has provided an effective mechanism for review, the undersigned must recommend to the district court that it abstain from exercising its diversity jurisdiction and, in accordance with Burford, remand this case to the North Carolina General Court of Justice for further proceedings.
IV. Alternative Findings as to Defendant's Motion to Dismiss
In the event abstention is determined to be inappropriate, the undersigned must recommend that defendant's Motion to Dismiss and/or for Summary Judgment be granted under Rule 12(b). While defendant has propounded a number of reasons for dismissal, it appears that the most fundamental reason is found in the statutory scheme which plaintiffs challenge. Chapter 58-36-65(h) of the North Carolina General Statutes provides, in relevant part, as follows:
(h) If an insured disputes his insurer's determination that the operator of an insured vehicle was at fault in an accident, such dispute shall be resolved pursuant to G.S. 58-36-1(2), unless there has been an adjudication or admission of negligence of such operator.
In turn, Chapter 58-36-1(2) provides for a procedure by which aggrieved persons or their representatives can appear before the North Carolina Rate Bureau. Further, the North Carolina "Administrative Procedure Act" provides detailed procedures for administrative review followed by centralized judicial review and ultimate appeal to the North Carolina Court of Appeals. N.C. Gen. Stat. 150B. Plaintiffs have argued, however, that Allstate could not be named as a defendant in such an action and that they would, therefore, be without a remedy because the Commissioner of Insurance has taken no adverse action. Review of the state's Administrative Procedure Act reveals that it clearly provides for the bringing of an administrative class action, inasmuch as a "person aggrieved" is defined as "any person or group of persons of common interest directly or indirectly affected substantially . . . by an administrative decision." While this court understands plaintiffs' concerns as to the viability of such a claim, at least one opinion of the North Carolina Attorney General has found that where the Legislature has delegated quasi judicial power to an employee insurance committee, such committee is "an agency" within the meaning of Chapter 150B-2(1). See Opinion of the Attorney General to Elizabeth H. Drury, Director, Office of Legislative and Legal Affairs, Department of Human Resources, 56 N.C.A.G. 25 (1986). It is not beyond reason that plaintiffs could make a similar argument in asserting that Allstate is similarly situated, in that the Legislature has delegated to it a quasi judicial function, making it an "agency" for the purpose of review under the APA.
Neither the "Filed Rate Doctrine," nor the requirement of exhaustion, nor the doctrine of "Primary Jurisdiction" can be avoided simply by redefining one's grievance with the end result of a regulatory scheme as a state constitutional challenge. While plaintiffs may in the end be correct as to the infringement of a state constitutional right to judicial review, the substantive issue is whether plaintiffs have been lawfully required to pay a higher rate for auto insurance. It would appear under North Carolina law that the governmental entity with expertise (in this case, the Rate Bureau) gets the first bite at that apple.
North Carolina law clearly requires that an aggrieved party must exhaust the administrative process before resorting to judicial remedies. Presnell v. Pell, 298 N.C. 715, 721-22 (1979). For these reasons and those more fully discussed in defendant's supporting and reply briefs, the undersigned will recommend that if the Rule 12(b) motion is reached, this action be dismissed without prejudice for failure of plaintiffs to first exhaust administrative remedies or such claim be deferred to the administrative agency.
RECOMMENDATION
IT IS, THEREFORE, RESPECTFULLY RECOMMENDED that
(1) this court ABSTAIN from considering this action under Burford and REMAND this matter to the North Carolina General Court of Justice; and
(2) in the alternative, that defendant's Motion to Dismiss and/or for Summary Judgment be ALLOWED, and that this action be either DISMISSED without prejudice or DEFERRED to the state administrative agency for exhaustion of administrative remedies.
The parties are hereby advised that, pursuant to 28, United States Code, Section 636(b)(1)(C), written objections to the findings of fact, conclusions of law, and recommendation contained herein must be filed within ten (10) days of service of same. Failure to file objections to this Memorandum and Recommendation with the district court will preclude the parties from raising such objections on appeal. Thomas v. Arn, 474 U.S. 140 (1985), reh'g denied, 474 U.S. 1111 (1986); United States v. Schronce, 727 F.2d 91 (4th Cir.), cert. denied, 467 U.S. 1208 (1984).
This Memorandum and Recommendation is entered in response to defendant's Motion to Dismiss and/or for Summary Judgment (#5).
This 9th day of July, 1999.