No. 01-CV-1629 (JMR/FLN), 01-CV-1630 (PAM/SRN), 01-CV-1632 (DSD/SRN), 01-CV-1633 (ADM/AJB), 01-CV-1634 (DWF/AJB), 01-CV-1635 (DSD/JGL), 01-CV-1636 (DWF/SRN), 01-CV-1637 (PAM/JGL), 01-CV-2242 (MJD/JGL).
September 26, 2002
George Gregory Eck, Daniel James Brown, Dorsey Whitney, Minneapolis, MN, for Plaintiffs.
Thomas H. Boyd, Winthrop Weinstine, St. Paul, MN, Steven J. Boyd, Jennifer J. Coleman, Matthew J. Salzman, Stinson Morrison Hecker, Kansas City, MO, Robert j. Vancrum, Kristin L. Farnen, Frank W. Pechacek, Jr., Wilson Pechacek, Council Bluffs, IA, P. John Owen, Nat. Crop Ins. Services, Inc., General counsel, Overland Park, KS, Michael J. Davenport, Rain Hail LLC, JOhnston, IA, for Defendants.
This is one of many motions arising out of a dispute over crop insurance contracts. The present motion is brought by Federal Crop Insurance Corporation's ("FCIC") to dismiss the third-party complaint. For the reasons set forth herein, the Court finds the motion is premature, based on third-party plaintiffs' failure to exhaust their administrative remedies.
The facts of this case are outlined in this Court's Orders dated April 15, 2002 and September 26, 2002. For purposes of this motion, suffice it to say that sugar beet-growing plaintiffs claim their 2000 crop was extensively damaged by frost. The plaintiffs are seeking payment on multi-peril crop insurance contracts ("MPCI") issued by defendant insurance companies. The crop insurance was reinsured by the FCIC under the Standard Reinsurance Agreement ("SRA"). This reinsurance program is established by the Federal Crop Insurance Act ("FCIA")
The FCIC is an agency of the United States Department of Agriculture ("USDA"), and within the Risk Management Agency ("RMA"). See 7 U.S.C. § 1501 et seq. The SPA establishes the obligations of the insurer and reinsurer, setting the boundaries of their relationship. Disputes arising out of FCIC decisions are governed by 7 C.F.R. § 400.169.
In September, 2001, the insurance companies removed these sugar beet cases to federal court, and shortly thereafter, filed a third-party complaint against the FCIC. In the third-party complaint, the insurers denied any obligation to the farmers, stating liability should be borne instead by the FCIC. See Third-Party Comp. ¶ 3. According to the insurers, a Manager's Bulletin, MGR-01-010 ("Bulletin") issued by the RMA on March 2, 2001, altered the terms of the insurance and reinsurance agreements, thereby relieving the companies of any liability for the farmers' losses.
The Court's decision on the motion to remand can be found at 196 F. Supp.2d 905(D. Minn. 2002). The Court found it had jurisdiction in eight of the ten removed cases, and remanded the remaining cases to state court.
Prior to initiating their action against the FCIC, defendants contacted the Manager of the FCIC, as required by the Section V.Y of the SPA. The defendants and FCIC met on March 28, 2001, to discuss disagreements arising out of MGR-01-010, but were unable to resolve their differences.
The Bulletin addressed "[wlhether 2000 crop year sugar beets affected by drought, freeze, or other insurable causes during the insurance period that later manifested damage after being delivered to the processor are insurable." Bulletin at 1. It also outlined the history of the frost damage, the probable causes of loss, and possible questions arising under the standard policy. The Bulletin raised, but did not answer, questions regarding whether the nature of the crop damage altered the notice of loss provisions, whether the beets were in fact damaged, and whether the damages were covered by the insurance policy. Id. at 3. Finally, the RMA stated:
RMA believes that the type of losses experienced by the Minnesota producers in the above listed counties were contemplated under the Sugar Beet Crop Insurance Provisions when RMA elected to cover freeze as a cause of loss. Sugar beet experts assert that freeze damage did not manifest itself until after the end of the insurance period and following delivery of the affected sugar beets to the processor. In this case, RMA will reinsure any such 2000 crop year sugar beet losses that the reinsured companies elect to pay in those affected counties. RMA notes that it is solely the reinsured company's decision with respect to payment of these claims. RMA does not in any manner direct or obligate reinsured companies to pay these claims.
For any sugar beet claim that a reinsured company elects to pay, the produced must meet the requirements contained in section 14(e) of the Basic Provisions for establishing that the loss of production was directly attributed to an insurable cause of loss, the cause of loss occurred during the insurance period, and the total production or value received for the production.
To determine whether the sugar beets suffered an insurable loss, producers must provide:
1. All harvest and delivery records; and
2. Affidavits or other evidence establishing that the producer's sugar beets were frozen; and
3. Processing records for each load of sugar beets delivered by the producer to the processor.
If any reinsured company experiences difficulty in calculating or separating the amount of sugar beet production for individual insures as a result of commingling sugar beet production after it was delivered to the processor, the reinsured company may contact RMA for assistance in locating experts to provide assistance in making these determinations.Id. at 4. The Bulletin's effect has not yet been considered by the USDA Board of Contracts.
The FCIC asks the Court to dismiss the third-party complaint, pursuant to Rule 12(b)(1) and (6), for lack of jurisdiction and failure to state a claim. See Fed.R.Civ.P. 12(b)(1) ("lack of jurisdiction over subject matter"); Fed.R.Civ.P. 12(b)(6) ("failure to state a claim upon which relief can be granted"). On such a motion, of course, the Court accepts all factual allegations by the non-moving parties as true. See McSherry v. Trans World Airlines, 81 F.3d 739, 740(8th Cir. 1996). A motion to dismiss may be granted "only if no set of facts would entitle the plaintiff to relief." See id. The FCIC claims the insurance companies failed to exhaust their administrative remedies, thereby baring federal jurisdiction, or alternatively limiting judicial consideration of the third-party claims.
It is axiomatic that federal courts are courts of limited jurisdiction. As such, the requirement that jurisdiction be established as a threshold matter is inflexible and without exception. Godfrey v. Pulitzer Publ'g Co., 161 F.3d 1137, 1141 (8th Cir. 1998). While defects in personal jurisdiction may be waived by the parties, subject matter jurisdiction is primary, and acts as an absolute stricture. See In re: Prairie Island Dakota Sioux, 21 F.3d 302, 304-05(8th Cir. 1994). When required by Congress, failure to exhaust administrative remedies bars federal jurisdiction. See In Home Health, Inc. v. Shalala, 272 F.3d 554, 559 (8th Cir. 2001). The exhaustion requirement assures that Courts receive the fullest benefit of administrative review, avoiding "premature interruption of the administrative process, " promoting deference to agency discretion, and allowing the agency to "develop the necessary factual background." See McKart v. United States, 395 U.S. 185, 194-95 (1969)
The exhaustion requirement comes in two forms: statutory mandate or judicially created doctrine. While the former is a prerequisite to maintaining an action, the later is discretionary and flexible. See McCarthy v. Madigan, 503 U.S. 140 (1992). In this case, Congress has mandated administrative exhaustion in cases against the USDA and the FCIC. As such, the Court need not consider the common law doctrine.
Congressional intent is paramount when considering whether exhaustion is jurisdictional. See McCarthy, 503 U.S. at 144. "Where Congress specifically mandates, exhaustion is required. But where Congress has not clearly required exhaustion, sound judicial discretion governs." Id. When Congress has adopted a statutory provision, the Court cannot waive exhaustion. See McNeil v. United States, 508 U.S. 106, 111 (1993); U.S. v. Dico, Inc., 136 F.3d 572, 575-76 (8th Cir. 1998). Conversely, where Congress has not enacted an explicit requirement, a court may not create one. See Darby v. Cisneros, 509 U.S. 137, 153-54 (1993); Coteau Props. v. Dep't of Interior, 53 F.3d 1466, 1471 (8th Cir. 1995)
In 7 U.S.C. § 6912(e), Congress expressly requires exhaustion of administrative appeals before a lawsuit may be brought against an agency of the Department of Agriculture. The Section provides:
Defendant insurance companies do not contest 7 U.S.C. § 6912(e)'s exhaustion requirement. The Circuit split which has arisen since this matter was submitted merits consideration.
[n]otwithstanding any other provision of law, a person shall exhaust all administrative appeal procedures established by the Secretary or required by law before the person may bring an action in a court of competent jurisdiction against. . . an agency. . . of the Department."See 7 U.S.C. § 6912(e). While the Eighth Circuit Court of Appeals has not considered whether the provision is jurisdictional, a number of trial courts and two federal appellate courts of appeal have done so.
Purely legal questions, involving no agency fact-finding, are exempt from the exhaustion provision. See Kuster v. Veneman, 2002 U.S. Dist. LEXIS 14431, *4-5 (D.N.D. Aug. 1, 2002) (examination of whether policy change was arbitrary and capricious involves pure question of law).
The Second Circuit Court of Appeals in Bastek v. Federal Crop Insurance Corp., found 7 U.S.C. § 6912(e)'s exhaustion requirement unambiguous, and therefore jurisdictional. See 145 F.3d 90, 95 (2d Cir. 1998); see also Kleissler v. United States Forest Serv., 183 F.3d 196 (3d Cir. 1999) (requiring 7 U.S.C. § 6912(e) exhaustion in suit against the Forest Service); Am. Growers Ins. Co. v. Fed. Crop Ins. Corp., 2002 U.S. Dist. LEXIS 12777 (S.D. Iowa June 26, 2002) (finding 7 U.S.C. § 6912(e) and 7 C.F.R. § 400.169 compelled exhaustion before suit); Gilmer-Glenville, LP v. Farmers Home Admin, 102 F. Supp.2d 791 (N.D. Ohio 2000) (requiring 7 U.S.C. § 6912(e) exhaustion in suit against the FmHA); Calhoun v. United States Dep't of Agric. Farm Serv. Agency, 920 F. Supp. 696 (N.D. Miss. 1996) (finding 7 U.S.C. § 6912(e) exhaustion a prerequisite to suit); Gleichman v. United States Dep't of Agric., 896 F. Supp. 42 (D. Mass. 1995)("It is hard to imagine more direct and explicit language requiring that a plaintiff suing the Departiment of Agriculture, its agencies, or employees, must first turn to any administrative avenues before beginning a lawsuit.")
Bastek, like the third-party claims at issue here, involved a dispute over FCIC indemnification. See id. at 91. In examining the language of 7 U.S.C. § 6912(e), the Second Circuit harbored, "little doubt that Congress's intent, in enacting this statute, was to require plaintiffs to exhaust all administrative remedies before bringing suit in federal court." Id. § at 95.
The Ninth Circuit Court of Appeals, however, reached the opposite conclusion. It found the exhaustion requirement in 7 U.S.C. § 6912(e) was not jurisdictional. See McBride Cotton and Cattle Corp. v. Veneman, 290 F.3d 973 (9th Cir. 2002). The Ninth Circuit held that "failure to exhaust does not deprive a federal court of jurisdiction when the exhaustion statute is merely codification of the exhaustion requirement," and lacks "sweeping and direct language" requiring exhaustion. See id. at 978. Because the Ninth Circuit found the text of 7 U.S.C. § 6912(e) did not define or limit jurisdiction, the Court found it a mere codification, and therefore not a prerequisite to jurisdiction. Id. at 980; see also Farmers Alliance Mut. Ins. Co. v. Fed. Crop. Ins. Corp., 2001 U.S. Dist. LEXIS 241, *7-8 (D. Kan. Jan. 3, 2001) (finding failure to exhaust remedies is not a jurisdictional matter, but is a valid affirmative defense)
This Court considers the Second Circuit's reasoning most consistent with the Eighth Circuit's approach to exhaustion, as seen in other administrative law cases, and more consonant with the Supreme Court's decision in Weinberger v. Salfi, 422 U.S. 749, 757 (1975) (requiring clear language expressing jurisdictional nature of exhaustion requirement). See also In Home Health, Inc. v. Shalala, 272 F.3d 554 (8th Cir. 2001) (requiring exhaustion to fulfill purposes underlying the requirement); Chelette v. Harris, 229 F.3d 684 (8th Cir. 2000) (finding Prison Litigation Reform Act "PLPA" exhaustion requirement is not jurisdictional because its language is indirect and a general codification). The statutory language in 7 U.S.C. § 6912(e) is distinguishable from language the Eighth Circuit described as mere codification. In Chelette, the Court found the PLPA's language stating "no action shall be brought . . . . until such administrative remedies as are available are exhausted," did not create a jurisdictional bar
In enacting 7 U.S.C. § 6912(e), by contrast, Congress made exhaustion an affirmative requirement, providing that "a person shall exhaust" administrative remedies before initiating litigation against the FCIC. "[W]hen Congress enacted section 6912(e), it did so against the backdrop of principles of collateral estoppel, res judicata, and administrative estoppel." See Am. Growers Ins. Co., 2002 U.S. Dist. LEXIS 12777 at *10. A waiver of exhaustion would divest the USDA of its prerogative to review determinations and pronouncements prior to judicial action. It would remove the FCIC's ability to create a factual record, and render the agency's crop insurance expertise moot. Under these conditions, this Court finds the requirement jurisdictional.
The Court must next determine whether the administrative appeals procedure adopted by the Secretary of Agriculture, 7 C.F.R. § 400.169, requires exhaustion in this case. The regulation provides:
(a) If the [policy-issuing] company believes that the Corporation has taken an action that is not in accordance with the provisions of the Standard Reinsurance Agreement. . . it may request the Deputy Administrator of Insurance Services to make a final administrative determination addressing the disputed action. The Deputy Administrator of Insurance Services will render the final administrative determination of the Corporation with respect to the applicable actions. All requests for a final administrative determination must be in writing and submitted within 45 days after receipt of the disputed action.
* * *
(c) A company may also request reconsideration by the Deputy Administrator of Insurance Services of a decision of the Corporation rendered under any Corporation bulletin or directive which bulletin or directive does not interpret, explain or restrict the terms of the reinsurance agreement. The company, if it disputes the Corporation's determination, must request reconsideration of that determination in writing, within 45 days of the receipt of the determination. The determination of the Deputy Administrator will be final and binding on the company. Such determinations will not be appealable to the Board of Contract appeals.
(d) Appealable final administrative determinations of the Corporation under paragraph (a) or (b) of this section may be appealed to the Board of Contract Appeals in accordance with the provisions of subtitle A, part 24 of the Code of Federal Regulations.7 C.F.R. § 400.169. In short, these provisions require that an insurance company appeal any dispute concerning whether an FCIC Bulletin explains, restricts or interprets the SPA to the Board of Contract Appeals.
The USDA Board of Contract Appeals regulations provides jurisdiction over final decisions by the FCIC. 7 C.F.R. § 24.4(b).
The Court "must give substantial deference to an agency's interpretation of its own regulations" unless that interpretation is "plainly erroneous or inconsistent with the regulations." Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994) (quoting Bowles v. Seminole Rock Sand Co., 325 U.S. 410, 414 (1945)). An agency's own interpretation of its procedural rules is afforded great weight. Appley Bros v. United States, 164 F.3d 1164, 1172-73 (8th Cir. 1999) (citingChevron, U.S.A. Inc. v. Natural Res. Def. Council, 467 U.S. 837, 944-45 (1983)).
In 1997, the USDA Board of Contract Appeals considered an appeal under an earlier version of 7 C.F.R. § 400.169, in a case involving application of the exhaustion regulation to an FCIC Manager's Bulletin.See Rain Hail Ins. Serv., Inc., AGBCA No. 97-143-F (1997). There, the Board determined that "where a dispute relates to a bulletin or directive that affects, interprets, explains or restricts an SPA, the Board has jurisdiction." Id. at 5-6. When, as in that case, a Manager's Bulletin affects the SPA, all appeals must be exhausted before the Board. See id. at 6.
The parties hotly contest Rain Hail's precedential value. Defendants note Rain Hail involves appeal of any directive that might "affect, interpret, explain or restrict" the terms of the reinsurance agreement. See id. at 5 (emphasis added). The regulation was subsequently modified to remove the word "affect". See 65 Fed. Reg. 3782 (Jan. 25, 2000). The insurance companies claim this change removes the Board's jurisdiction over appeals related to Manager's Bulletins, as theRain Hail opinion resulted in the amendment. Defendants argument is off the mark. The Court sees no basis upon which to read more into the modification than the regulation's language requires. MGR-01-010 interprets, explains or restricts the terms of the reinsurance agreement; as such, it is covered by the exhaustion requirement.
Defendants attempt to make much of the fact that FCIC, here, takes the opposite side of the argument it made in Rain Hail, where it denied any duty to bring Manager's Bulletin disputes before the Board. The FCIC now takes the position that a Board appeal is required. Defendants' point is insubstantial; it is altogether unsurprising that the FCIC, having been properly instructed, now seeks to function in accord with a well-reasoned legal decision.
Plaintiff alternatively argues that the Bulletin cannot be construed to interpret, explain, or limit the SPA. The terms of MGR-01-010, however, plainly interpret and explain the application of the reinsurance agreement. Section II.A. of the SPA states, "[o]nly eligible crop insurance contracts will be reinsured and subsidized under this Agreement." Section I of the SPA defines crop insurance contracts to mean "a crop insurance contract that is sold and serviced consistent with the Act, 7 C.F.R. chapter IV, FCIC approved regulations and procedure. . . and on forms approved in writing by the FCIC." The reinsurance agreement contains the covered terms and the coverage limits.
The Bulletin discusses in detail farmers' eligibility for payments on claims made under the underlying crop insurance contracts, thus making them subject to reinsurance. It includes an analysis of whether there would be modifications to the normal coverage for an insurable loss, whether the sugar beet growers complied with the insurance agreement, and whether the RMA will reinsure losses paid in the affected counties. See Bulletin at 3-4. These statements explain both the SPA and the RMA obligations for reinsurance. The exhaustion provisions therefore apply to this dispute.
Finally, Section V.Y. of the SPA also contains an exhaustion provision which provides:
If the company disagrees with an act of omission of FCIC, except those acts implemented through the rulemaking process, the Company shall provide written notice of such disagreement to the Manager of FCIC. Within 10 business days of receipt of notice, the Manager or designee will schedule a meeting with the company in an attempt to resolve the disagreement. Notwithstanding any other provision in this section, any subsequent decision by FCIC on the act or omission will be final in the administrative process and, therefore subject only to review by the Board of Contract Appeals in a matter relating to this agreement or to judicial review.
Here, the insurance companies disagree with an FCIC action: the issuance of MGR-01-010 and its implication. See, e.g., Def. Reply ¶ 21-30. A dispute over this type of administrative decision requires an appeal to the Board of Contract Appeals. This requirement is consistent with the terms of the SPA. As such, the Court must require administrative exhaustion.
The Eighth Circuit has recognized three limited exceptions to statutory exhaustion. These occur where the litigant "(1) raises a colorable constitutional claim collateral to his substantive claim of entitlement; (2) shows that irreparable harm would result from exhaustion; and (3) shows that the purposes of exhaustion would not be, served by requiring further administrative procedures." Anderson v. Sullivan, 959 F.2d 690, 693 (8th Cir. 1992) (citing Thorbus v. Bowen, 848 F.2d 901, 903 (8th Cir. 1988) and Mathews v. Eldridge, 424 U.S. 319, 329-31, 47 L.Ed.2d 18, 96 S.Ct. 893 (1976)). In this case, defendants have made no such constitutional claim, or indicated that Board consideration of MGR-01-010 would be inimical to the purposes of exhaustion. They simply assert exhaustion would waste judicial resources.
Congress imposed the exhaustion requirement "to provide the Secretary of Agriculture with the necessary authority to streamline and reorganize the Department of Agriculture to achieve greater efficiency, effectiveness, and economies in the organization and management of the programs and activities carried out by the Department." 7 U.S.C. § 6901. By its very nature, exhaustion may result in occasional redundancies, but it still serves its intended purpose of administrative efficiency and certainty. See Krempel v. Prairie Island Cmty, 125 F.3d 621, 623 (8th Cir. 1997) (emphasizing the importance of exhaustion for judicial economy). Exhaustion promotes judicial economy by "avoiding needless repetition of administrative and judicial factfinding, and by perhaps avoiding the necessity of any judicial involvement at all, if the parties successfully vindicate their claims before the agency". Peters v. Union Pac. R.R., 80 F.3d 257, 263 n. 3 (8th Cir. 1996). A proffered wish to save judicial resources gives no basis on which to reject Congress's explicit exhaustion requirement.
Defendants brought suit against the FCIC in the face of federal statutes and regulations requiring exhaustion prior to initiation of court action. Their failure to comply with the exhaustion requirement deprives this Court of jurisdiction. As a result, the Court is without power to consider third-party defendant's motion to dismiss for failure to state a claim.
Accordingly, third-party defendant FCIC's motion to dismiss [Docket No. 30] is granted.
IT IS SO ORDERED.
This matter is before the Court on defendants' motion to dismiss, or alternatively, to compell arbitration. The parties previously appeared on a motion to remand on December 14, 2001. For purposes of this motions only, the Court considers the facts as follows.
The Court's decision on the question of remand is found at 196 F. Supp.2d 905 (D. Minn. 2002).
These cases involve multi-peril crop insurance contracts covering sugar beets. Plaintiffs are sugar beet growers. In October, 2000, a hard frost damaged or destroyed their crops, causing significant financial loss. Plaintiffs had purchased multi-peril crop insurance that — according to their complaint — covered this loss. The crop insurance was in the form of a policy issued by the Federal Crop Insurance Corporation ("FCIC"), a government agency created under the Federal Crop Insurance Act ("FCIA"). This policy is codified at 7 C.F.R. § 457.8 and 457.109.
Plaintiffs took steps to mitigate the frost damage, but by mid-December, a loss had clearly occurred. After harvesting the crop and discovering the extent of the damage, plaintiffs submitted their crop insurance claims. Defendants denied the claims, apparently expecting the FCIC's Risk Management Agency ("RMA") to provide full coverage.
The question before the Court is whether it may now consider the merits of this dispute, or whether it must stay its hand, pending arbitration.
The Court must first determine if an agreement to arbitrate exists and, if so, to ascertain the scope of that agreement. See Keymer v. Mgmt Recruiters Int'l, Inc. 169 F.3d 501, 504 (8th Cir. 1999). This is because, "[a]rbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed to so submit." See ATT Technologies v. Communications Workers of America, 475 U.S. 643, 648 (1986)
Congress enacted the Federal Arbitration Act ("FAA"), 9 U.S.C. § 2, to "reverse the longstanding judicial hostility to arbitration agreements." Gammaro v. Thorp Consumer Discount Co., 15 F.3d 93, 95 (8th Cir. 1994). Courts must consider arbitration disputes in favor of arbitration. See Moses H. Cone Mem'l Hosp. v. Mercury Const. Corps, 460 U.S. 1 24-25 (1983); Webb v. Rowland Co., 800 F.2d 803, 807 (8th Cir. 1986). The Supreme Court has held that insurance policies are contracts "involving commerce," and therefore, subject to the FAA. See United States Dep't of Treasury v. Fabe, 508 U.S. 491 (1993); see also Allied-Bruce Terminix Co., Inc. v. Dobson, 513 U.S. 265 (1995) (construing the FAA as coextensive with congressional commerce clause authority). With these principles in mind, the Court examines whether arbitration is required here.
The Court's analysis begins with Paragraph 20 of the standard insurance policy. According to defendants, this clause requires arbitration, and compels a court to enforce its terms. The paragraph requires the parties to a crop insurance contract to arbitrate if they "fail to agree on any factual determination." See 7 C.F.R. § 457.8 at ¶ 20. The policy further provides that the insured "may not bring legal action against [the insurer] unless [the insured] has complied with all the policy provisions." See id. at ¶ 25. Plaintiffs acknowledge that in some situations arbitration might be appropriate, but argue this is not such a case.
Paragraph 20, entitled "Arbitration," states:
(a) If you and we fail to agree on any factual determination, the disagreement will be resolved in accordance with the rules of the American Arbitration Association. Failure to agree with any factual determination made by FCIC must be resolved through the FCIC appeal provisions published at 7 C.F.R. part 11.
(b) No award determination by arbitration or appeal can exceed the amount of liability established or which should have been established under the policy.
Plaintiffs first claim the insurance companies, having failed to adjust the claimed losses, made no factual determinations, thereby precluding arbitration because there is no determination to arbitrate. Plaintiffs' argument proves too much. It appears to the Court that defendants did, indeed, make an insurance coverage decision: they denied plaintiffs' claims; their offer, perforce, is zero. In correspondence to plaintiffs' attorney, defendants set forth a number of reasons for denying coverage. While plaintiffs may term these "perfunctory denials," even perfunctory denials are based on factual determinations. For purposes of this case, a determination has plainly been made.
If the defendants have truly failed to reach any decision, as plaintiffs suggest, that fact might suggest there is no ripe dispute in this case. Plaintiffs' suit clearly suggests they believe an active dispute exists between the parties, rendering the dispute arbitrable.
Nor will the Court do as plaintiffs suggest, and construe the reasons offered by defendants as involving only the legal effect of certain facts, and not actual factual determinations. This suggestion directly contravenes federal decisions addressing the breadth of the arbitration provision. See Ledford Farms, Inc. v. Fireman's Fund Ins. Co., 184 F. Supp.2d 1242 (S.D. Fla. 2001) (requiring the parties to resolve their dispute through arbitration); Nobles v. Rural Cmty. Ins. Servs., 122 F. Supp.2d 1290 (M.D. Ala. 2000) (compelling arbitration); see also IGF Ins. Co. v. Hat Creek P'ship, 349 Ark. 133 (2002) (compelling arbitration in crop insurance case); Crook v. Fireman's Fund Agribusiness, Inc., 2000 U.S. Dist. LEXIS 19878 (W.D. La. September 5, 2000) (compelling arbitration in crop insurance dispute).
In both of these cases, the courts interpreted the proffered reasons for denial of payment as presenting factual determinations — not legal questions. See Ledford Farms, 184 F. Supp.2d at 1245 (interpreting "practical to replant" to be a factual determination); Nobles, 122 F. Supp.2d at 1296 (finding whether lands have been harvested within required period constitutes a factual determination). Such determinations of coverage questions are precisely those left to arbitration under the insurance contract. The parties have agreed to arbitrate their factual disputes; absent waiver, that agreement is binding.
Having found arbitration appropriate, the Court must decide whether defendants' action and inaction in this case constitute waiver. Before the Court can address the question of waiver, however, it must select between Minnesota's insurance and arbitration law, as arguably required by the McCarran-Ferguson Act, 15 U.S.C. § 1012, and the FAA.
McCarran-Ferguson, a so-called reverse preemption statute, provides in relevant part, "No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance. unless such Act specifically relates to the business of insurance." See 15 U.S.C. § 1012(b). Congress enacted McCarran-Ferguson in 1946 to protect the states' ability to regulate insurance. The Act prevents otherwise neutral laws from preempting state insurance statutes. United States Dep't of Treasury v. Fabe, 508 U.S. 491, 499 (1993)
The applicability of McCarran-Ferguson's reverse preemption to a federal crop insurance scheme raises a question of first impression in this Circuit. The question, however, was recently considered by the Supreme Court of Arkansas. See IGF Ins. Co. v. Hat Creek P'ship, 349 Ark. 133 (2002) (finding FAA preempts state arbitration statute in a crop insurance contract case). The Arkansas decision is in accord with a decision rendered by the United States Court of Appeals for the Tenth Circuit, State of Kansas ex rel. Todd v. United States, 995 F.2d 1505, 1511 (10th Cir. 1993). Each court found federal crop insurance regulations fell beyond the scope of McCarran-Ferguson. See also Haeberlin Farms, Inc. v. IGE Ins. Co., 641 N.W.2d 816 (IA 2002);Continental Cas. Co. v. McCall, No. 97-797 (Ok. July 1, 2002) (issuing writ of mandamus directing judge to order arbitration)
Congress, in 1938, adopted the original FCIC crop insurance plan for the express purpose of regulating the business of insurance, specifically crop insurance. See 7 U.S.C. § 1501 et seq. (creating the Federal Crop Insurance Corporation). In doing so, Congress stated: "It is the purpose of this chapter to promote the national welfare by improving the economic stability of agriculture through a sound system of crop insurance and providing the means for the research and experience helpful in devising and establishing such insurance." 7 U.S.C. § 1502. This federal program was created to establish a nationwide system of crop insurance for farmers. As such, the Court finds it falls within the exemption to McCarran-Ferguson preemption, because this statute "specifically relates to the business of insurance." See cf. Humana Inc. v. Forsyth, 525 U.S. 299, 306 (1999) ("when Congress enacts a law specifically relating to the business of insurance, that law controls"). The Court finds it most unlikely that when Congress created federal crop insurance, specifically intending to provide a uniform and accessible system of farmer protection, it also intended to allow fifty states to administer that program according to fifty different state insurance regulatory schemes. Because Congressional statutes specifically relating to the business of insurance supersede state law, the FAA and other federal laws are applicable. The FCIC is to be construed according to the FAA and federal law, not Minnesota law or any other state law.
The federal crop insurance program's exemption from McCarran-Ferguson is supported by the statute creating the FCIC, the federal regulations adopted to administer the program, and the crop insurance contract, all of which include preemption provisions. In 7 U.S.C. § 1501(1), Congress stated:
State and local laws or rules shall not apply to contracts, agreements, or regulations of the Corporation or the parties thereto to the extent that such contracts, agreements, or regulations provide that such laws or rules shall not apply, or to the extent that such laws or rules are inconsistent with such contracts, agreements, or regulations.See also Federal Crop Ins. Co. v. Merrill, 332 U.S. 380 (1947) (upholding FCIC preemption of state laws for insurance contracts). In its administrative regulations, the FCIC's regulations further preempt inconsistent state and local laws. See 7 C.F.R. § 351-52 (exercising the statutory authority to preempt); 7 C.F.R. § 457.8 at ¶ 31 (explicitly preempting state law and policy).
Having determined federal law is controlling, the Court turns to plaintiffs' assertion of waiver. Applying the FAA, the Eighth Circuit Court of Appeals found arbitration waived "where the party claiming a right to arbitrate: (1) knew of a right to arbitrate; (2) acted inconsistently with that right; and (3) prejudiced the party by these inconsistent acts." Ritzel Communications, Inc. v. Mid-American Cellular Tell. Co., 989 F.2d 966, 969 (8th Cir. 1993). Waiver must be considered in light of federal policy favoring arbitration. See Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983). The parties do not contest that defendants knew of their right to arbitrate. Instead, plaintiffs argue defendants acted inconsistently with that right, and thereby prejudiced them.
Plaintiffs cite to Minnesota cases proposing various grounds for waiver: an unqualified denial of claims upon receipt of proof of loss,see, e.g., Moore v. Sun Ins. Office, 111 N.W. 260, 252 (Minn. 1907) and failure to proceed in good faith, citing Niazi v. St. Paul Ins. Co., 121 N.W.2d 349, 356 (Minn. 1963). Because the Court is applying the FAA standard, these arguments are incorporated into the waiver discussion above.
Plaintiffs claim defendants' actions have been inconsistent with an intent to arbitrate. Specifically, they argue defendants' actions, including removing this case to federal court, bringing a third-party complaint, and disputing subject matter jurisdiction, are inconsistent with an intent to arbitrate. But it is clear that mere participation in litigation is insufficient to overcome the presumption against arbitration. See Stifel Nicolaus Co. v. Freeman, 924 F.2d 157, 158 (8th Cir. 1991) (finding party had not waived arbitration when no issues are litigated, and "limited discovery conducted will be usable in arbitration"). The fact that a party defended litigation does not constitute waiver, and should be differentiated from "substantially invoking litigation machinery." See Ritzel Communications, 989 F.2d at 969.
The Court does not find defendants have acted inconsistently with their right to arbitrate factual disputes. Their answers, filed on or about September 12, 2001, assert the right to arbitrate as an affirmative defense. See, e.g., Answer at ¶ 58. "Where, as here, the insurer raises the issue of arbitration within its Answer, and in so doing, has `disclosed an intent. . . not to abandon the arbitration provision [,]' estoppel will not prevent the insurer from seeking a resort to the arbitration clause." Lakehead Pipe Line Co., Inc v. Am. Home Assurance Co., 981 F. Supp. 1205, 1218 (D. Minn. 1997) (ellipses in original). Because defendants asserted their right to arbitrate in their first responsive pleading, the case is not analogous to those where parties waited months before seeking arbitration, filing dispositive motions in the interim. See Ritzel Communications, 989 F.2d at 970 (citing St. Mary's Med. Ctr v. Disco Aluminum Prods., 969 F.2d 585, 587 (7th Cir. 1992)); Barker v. Golf U.S.A., Inc., 154 F.3d 788, 793 (8th Cir. 1998) (holding arbitration waived only when party attempts to litigate merits of the case). Similarly, defendants' arguments in favor of removal, as they involve only jurisdictional concerns, do not go to the substance of the insurance dispute and do not constitute waiver.
Defendants filing a third-party complaint against the FCIC raises a closer question, as it involves the defendants' active utilization of the litigation process. The "mere filing of a third-party complaint by a party that seeks arbitration will not permit a court to find that the right to arbitrate has been waived." See Maxum Foundations, Inc. v. Salus Corp., 779 F.2d 974, 982 (4th Cir. 1985). In order to find prejudice, plaintiffs must face procedural or other burdens caused by the addition of the third party defendant. See id.
Plaintiffs claim defendants' introduction of the FCIC into this dispute is prejudicial to their rights, specifically arguing that limited jurisdiction over the FCIC may require judicial reconsideration of arbitral decisions. Plaintiffs' argument, however, asks the Court to find a mountain in a mole-hill. As plaintiffs have stated repeatedly, the arbiter has authority to resolve only factual disputes, and may not make legal determinations. This limitation makes extensively duplicative proceedings unlikely. Plaintiffs' claim that some issues might be reconsidered is simply insufficient to avoid arbitration. See Gree Tree Fin. Corp. v. Randolph, 531 U.S. 79, 92 (2000) (holding that the moving party bears burden of establishing likelihood that inappropriate costs will result)
In seeking to avoid arbitration, plaintiffs ignore the very nature of federal crop insurance. These contracts are written by the issuing defendants and reinsured by the FCIC, thereby virtually guaranteeing that any significant dispute will ultimately involve a suit for indemnification against the FCIC. While suits for derivative liability may in some situations be deemed a substantiative invocation of the litigation process, in the crop insurance context, such actions are routine and expected. The FCIC's inability to participate in the contractually agreed upon arbitration agreement was known to both parties at all times. That resolution of a dispute might be complicated is not grounds for the Court to find prejudice or waiver of arbitration.
Alternatively, plaintiffs claim a letter written by Minnesota Attorney General Michael Hatch proves defendants failure to act in good faith, thus precluding arbitration. Even assuming Mr. Hatch's views could bind this Court — a highly problematic presumption — the behavior he describes evinces no desire to avoid arbitration. See Ivax Corp. v. B. Braun of Am., Inc., 286 F.3d 1309, 1318-19 (11th Cir. 2002) (finding bad faith conduct that breaches agreement between parties cannot be construed to waive arbitration) Difficulty in reaching a resolution to an insurance claim cannot be equated with waiver of arbitration; if it could, parties would never arbitrate insurance disputes. See id.
Finally, the Court considers remedies, for defendants seek dismissal of the case in its entirety, or alternatively, to compel arbitration. Defendants tie their dismissal request to the contract's language providing "[y]ou may not bring legal action against us unless you have complied with all of the policy provisions." 7 C.F.R. § 457.8 at ¶ 25. According to defendants, this language precludes any Court action.
This argument simply proves too much. If read as expansively as the defendants wish, the language would prevent any case from reaching court; after all, if "all the policy provisions" have been complied with, the parties would have satisfied contract terms resolving the claims amicably. While this is, indeed, a consummation devoutly to be wished, it may never exist in the real world.
Defendants' request, moreover, seems inappropriate given the restraints on the arbiter's power in this case. As the contract only provides for arbitration of factual disputes, the arbiter cannot resolve the plaintiffs' state law claims, see Ledford Farms, 194 F. Supp.2d at 1245;Nobles, 122 F. Supp.2d at 1301. Under the FAA, compelling arbitration, staying this matter, is appropriate. See 9 U.S.C. § 3 ("If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration. . . shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement.") (emphasis added); Houlihan v. Offerman Co., 21 F.3d 692, 695 (8th Cir. 1994).
The parties herein entered into a standard crop insurance contract, one that requires as a prerequisite to any legal action resolution of all factual disputes through arbitration. That arbitration has not yet occurred. Accordingly, IT IS ORDERED that:
1. Defendant's motion to compel arbitration [Docket No. 39] is granted.
2. The above-captioned cases are stayed pending arbitration. The Court retains jurisdiction pending the outcome of those proceedings.