Opinion
Cause No. EV 99-0014-C H/H
March 3, 2001
ENTRY ON SUBJECT MATTER JURISDICTION
After reviewing the pending motion for summary judgment, the court raised doubts about its subject matter jurisdiction in this action. The parties rely on the court's diversity jurisdiction under 28 U.S.C. § 1332(a), which requires that the amount in controversy be considered "exclusive of interest and costs." Citing Principal Mutual Life Ins. Co. v. Juntunen, 838 F.2d 942, 943 (7th Cir. 1988) (holding that interest arising from delayed payment could not be counted toward amount in controversy, and dismissing action after judgment on the merits in district court), the court ordered the parties to show cause why the action should not be dismissed for lack of subject matter jurisdiction. Plaintiff responded to the order. Defendants have not filed a reply within the time allowed by court order.
Plaintiff Tri-State Refractories Corporation has sued in this case to collect money it says defendants owe for labor, services, and equipment that plaintiff provided in building and installing a 66,000 pound aluminum melting furnace. Plaintiff asserts the "base amount" of its invoice was $74,542.00, which is just short of the $75,000 floor that must be exceeded "exclusive of interest and costs" to support diversity jurisdiction. In Paragraph 4 of its response to the court's order to show cause, plaintiff has explained the factual basis it relies upon to invoke diversity jurisdiction:
Although the Plaintiff submitted to Certified its invoice reflecting this principal amount [ i.e., $74,542.00] due and owing as of July 31, 1998, and although Certified Industrial Technologies' President, Mr. Max Raffoul, acknowledged this principal debt due and owing on October 22, 1998, Certified still continued, nonetheless, to refuse to pay for the same. Ultimately, Tri-State was forced to file suit the next year on February 2, 1999. Since several months passed without any payment from Defendants for any part of the furnace that was provided, the Plaintiff was further damaged, beyond simply the principal amount of this invoice.
Plaintiff's invoice stated its terms were "net 10 days." Plaintiff claims it is entitled to an additional $2,663.09 in damages, which it calculated by accruing interest at the rate of 8 percent per year running from ten days after the invoice was issued until January 20, 1999, about two weeks before suit was filed. If it is permissible to add that $2,663.09 to the original invoice amount of $74,542.00, the jurisdictional amount in controversy would be reached
In the Principal Mutual Life case cited above, the Seventh Circuit held that such additions of interest resulting from delayed payment of principal obligations may not be counted toward the jurisdictional amount in controversy. The case involved a dispute over life insurance proceeds. The jurisdictional amount in controversy could not be satisfied without including several hundred dollars in interest calculated from the insured's death until the date of payment. The court explained:
"Interest" for purposes of 1332(a) is a sum that becomes due because of delay in payment. Velez v. Crown Life Insurance Co., 599 F.2d 471, 473-74 (1st Cir. 1979). The sums denominated interest in the form and affidavit meet that definition. The form explicitly says that these amounts are interest on the cash death benefit "from the insured's death until the date of payment."838 F.2d at 943. The court then vacated a judgment on the merits of the case and ordered dismissal for lack of jurisdiction.
Plaintiff's response to the order to show cause demonstrates that the interest plaintiff relies upon to exceed $75,000 in controversy is indeed interest resulting from defendant's delayed payment of the alleged obligation of less than $75,000. Principal Mutual Life therefore requires dismissal here. Nevertheless, plaintiff offers two related arguments to support diversity jurisdiction in this case.
First, plaintiff cites Brown v. Webster, 156 U.S. 328 (1895), which drew an "elementary distinction" between "interest as such" and "the use of an interest calculation as an instrumentality in arriving at the amount of damages to be awarded on the principal demand." 156 U.S. at 329. Plaintiff Tri-State Refractories claims it does not seek "interest as such" but has only used an interest calculation to arrive at the amount of damages it should be awarded on its principal claim. To modern readers, the distinction described in Brown v. Webster may seem more subtle than elementary, but plaintiff's argument would effectively erase the distinction entirely.
When Brown v. Webster was decided, the diversity statute required the amount in controversy to exceed $2,000 exclusive of interests and costs. The plaintiff's complaint had demanded $6,000 for eviction from land to which the defendant had given him a warranty deed. The plaintiff had paid defendant only $1,200 for the property some years earlier. Another party apparently established a better title to the land and won eviction of plaintiff from the property, leading to the lawsuit in federal court.
The defendant in Brown argued that the remedy for wrongful eviction under state law was limited to the return of the purchase price, plus interest. The defendant therefore argued that the purchase price alone was insufficient to establish jurisdiction and that the interest could not be counted toward the amount in controversy. From this court's examination of the Supreme Court's opinion, however, it appears that the Court focused its attention on the demand for $6,000 in the complaint. "This was the principal controversy," wrote the Court at page 329, and later: "The sum of the principal demand determines the question of jurisdiction; the accessory or the interest demand cannot be computed for jurisdictional purposes. Here the entire damage claimed was the principal demand without reference to the constituent elements entering therein." Id. at 330.
To understand the distinction drawn by the Brown Court between "interest as such" and interest as an "instrumentality of damages," it is helpful to focus on the unusual feature of the case: the eviction claim had not even arisen until long after the plaintiff had paid the purchase price, so the interest component of the damages had not arisen "solely by virtue of a delay in payment," as Judge Aldrich explained for the First Circuit in Regan v. Marshall, 309 F.2d 677, 678 (1st Cir. 1962). Judge Aldrich went on to explain that Brown involved a case "where the principal claim itself, at the time it arose, was made up in part of interest." Id. (emphasis added). In that sense, Brown was similar to cases in which a plaintiff sues on a judgment, some portion of which may have been interest, but the suit on the judgment constitutes "a new and single cause of action," so that the entire amount counts toward the jurisdictional amount in controversy. Id. at 678, citing Richie v. Richie, 186 F. Supp. 592, 594 (E.D.N.Y. 1960), and Restatement (First) of Judgments § 47 (1942).
Plaintiff, as part of its effort to take advantage of the Brown rule, points out that prejudgment interest is a proper element of damages under Indiana law when the amount of the damages is ascertainable. See Travelers Ins. Co. v. Transport Ins. Co., 846 F.2d 1048, 1051 (7th Cir. 1988) (applying Indiana law). The Seventh Circuit explained in Travelers that such prejudgment interest is recoverable under Indiana law "not as interest but as additional damages to accomplish full compensation." Id. at 1052, quoting Indiana Ins. Co. v. Sentry Ins. Co., 437 N.E.2d 1381, 1391 (Ind.App. 1982) (emphasis in original).
By this argument, plaintiff seems to be arguing that prejudgment or pre-filing interest under Indiana law should not be excluded from determinations of the amount in controversy under 28 U.S.C. § 1332(a). This argument stretches Brown beyond recognition. The argument would, if accepted, effectively nullify the statutory language excluding interest from the amount in controversy. To return to the Seventh Circuit's controlling point in Principal Mutual Life, for purposes of § 1332(a), interest "is a sum that becomes due because of delay in payment." 838 F.2d at 943. Plaintiff's response to the order to show cause in this case demonstrates that it could reach the required amount in controversy only by including interest resulting solely from "delay in payment," which Principal Mutual Life held may not be counted toward the amount. Accord, State Farm Mut. Auto. Ins. Co. v. Narvaez, 149 F.3d 1269, 1271 (10th Cir. 1998) (vacating judgment on the merits and holding that interest for delayed payment of uninsured motorist benefits must be excluded from amount in controversy); Athan v. Hartford Fire Ins. Co., 73 F.2d 66, 67 (2d Cir. 1934) ("The phrase `exclusive of interest and costs' necessarily refers to interest accrued prior to filing the complaint because that is the time when the ad damnum will be stated, and it is by the ad damnum that the amount in controversy is determined."); Siemens Energy Automation, Inc. v. M M Custom Coach, Inc., No. 89-8666, 1990 WL 12329, at *1 (E.D.Pa. Feb. 14, 1990) (where buyer failed to pay for purchase on time and contract required imposition of "service charge" for delayed payment, service charge was interest that could not be counted toward amount in controversy).
Professors Wright and Miller have explained: "The apparent purpose of excluding interest in computing the jurisdictional amount is to prevent the plaintiff from delaying suit until the claim, with accruing interest, exceeds the statutory minimum." 14B Wright Miller, Federal Practice and Procedure § 3712 at 280 (3d ed. 1998), citing, e.g., Brainin v. Melikian, 396 F.2d 153, 155 (3d Cir. 1968), citing in turn 1 Moore's Federal Practice, § 0.99 at 903 (2d ed. 1964); see also 15 Moore's Federal Practice § 102.106[5][b] at 102-180 (3d ed. 2000) ("courts often look to whether the interest arose solely because of delay in payment. If so, its inclusion would violate the apparent purpose for excluding interest in computing the jurisdictional amount, to prevent plaintiff from delaying suit until the claim, with accruing interest, exceeds the statutory minimum.").
That rationale for excluding interest from the calculation applies squarely to this case. Under plaintiff's theory here, the court would not have had jurisdiction over this dispute on the eleventh day after plaintiff issued its invoice, when payment was one day late. Under plaintiff's theory, however, diversity jurisdiction became available after enough time had passed and enough interest had accrued to raise the total of principal and interest above $75,000. That theory is directly contrary to the language and purpose of the statute and the controlling case law construing that statute. Accordingly, this action must be dismissed for lack of subject matter jurisdiction. See, e.g., Del Vecchio v. Conseco, Inc., 230 F.3d 974, 980 (7th Cir. 2000) (vacating judgment on merits and ordering dismissal for lack of jurisdiction because amount in controversy was too low, despite "the waste of effort represented by a case that has been fully litigated in the wrong court"). The motion for summary judgment is denied as moot. Final judgment will be entered accordingly.
So ordered.