Mtl Omaha Ins Co v. Natl Assn Govt Empl

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued April 10, 1998 Decided June 23, 1998

No. 97-5129

Mutual of Omaha Insurance Company and

Union Labor Life Insurance Company,

Appellees

v.

National Association of Government Employees, Inc., et al.,

Appellants

Office of Personnel Management and

Constance J. Horner, in her official capacity as

Director of OPM,

Appellees

Appeal from the United States District Court

for the District of Columbia

(88cv0516)

Denis F. Gordon argued the cause for appellants with

whom Brad W. Spencer was on the briefs. James R. Barnett

entered an appearance.

Dara A. Corrigan, Assistant United States Attorney, ar-

gued the cause for appellees Office of Personal Management

and Constance J. Horner, with whom Wilma A. Lewis, Unit-

ed States Attorney, and R. Craig Lawrence, Assistant United

States Attorney, were on the brief. John D. Bates, Assistant

United States Attorney, entered an appearance.

William O. Bittman argued the cause for appellees Mutual

of Omaha Insurance Company and Union Labor Life Insur-

ance Company, with whom Michael Barrett was on the brief.

James S. Ray entered an appearance.

Before: Silberman, Henderson, and Rogers, Circuit

Judges.

Opinion for the Court filed by Circuit Judge Silberman.

Silberman, Circuit Judge: The National Association of

Government Employees (the Union or NAGE) appeals from a

district court order "extinguishing" its claim for money con-

tained in a contingency reserve fund maintained by the Office

of Personnel Management (the Office or OPM). The district

court lacked jurisdiction to make this determination--and

may well have lacked jurisdiction over the whole case--thus

we vacate its order.

I.

The Federal Employee Health Benefits Act establishes a

subsidized health insurance program for civilian employees

and annuitants of the federal government. Carriers contract

with OPM, the agency that oversees the program, to provide

health insurance to those who choose to enroll. As an

"employee organization," the Union qualified as a "carrier"

under the statute, 5 U.S.C. s 8903(3) (1994), and it contracted

with the Office to sponsor a health insurance program for its

members. That contract subjected all disputes arising under

it to the jurisdictional limitations of the Contract Disputes

Act. By subcontract, Mutual of Omaha Insurance Company

(Mutual) and Union Labor Life Insurance Company (Union

Labor or ULLICO) underwrote the plan during successive

periods. The Office maintains a "contingency reserve fund"

comprised of three percent of the plan's total contributions

for each plan established under the Act. When a plan's costs

exceed its annual income, the carrier may apply for a special

transfer from this surplus account. 5 C.F.R. s 890.503(c)(5)

(1998).1

After suffering approximately $17.5 million in losses during

its underwriting period, Mutual applied to the Office for a

special transfer from the NAGE plan's contingency reserve

fund. The Office refused to consider the application, taking

the position that only the Union, the party with whom it

contracted, qualified as a "carrier" of the plan. Mutual then

sued both the Office and the Union, but ultimately dropped

its claims against the Union in a 1990 settlement agreement.

Union Labor, afraid that Mutual's claims would deplete the

contingency reserve, intervened as a plaintiff in the lawsuit to

recover losses it had incurred underwriting the NAGE plan.

Two days before trial, the parties settled. They recorded

the agreement in front of the district court on August 9, 1995:

Mr. Kozma (Counsel for ULLICO): [W]e all understand

that Mr. Haynes [Assistant U.S. Attorney] has to get his

approvals and all of that, but with everybody's concur-

rence, I will go ahead and state the settlement as I

understand it.

O.P.M. has agreed to pay out $17,450,000 out of the

contingency reserve fund. Of that amount, four-million

will go to Mutual of Omaha. The balance will come to

Union Labor Life Insurance Company.

We have agreed that the payment should be within

forty-five days. That is subject to O.P.M. using--O.P.M.

and the U.S. Attorney using their best efforts to obtain

__________

1 At the time this lawsuit was filed, this regulation was codified

at 5 C.F.R. s 890.503(c)(6).

approval and arrange for the payment within that time

period.

We would like to see the money as soon as possible,

obviously.

All claims against all parties will be dismissed. No

party receives any fees or costs. Each party bears their

own fees and costs.

And that's pretty much my understanding.

Mr. Spencer: Your Honor, Brad Spencer for NAGE.

That will include the claims against NAGE which we

bifurcated for a separate trial.

The Court: I understand.

Mr. Spencer: This will wipe this case off the docket.

The Court: All right.

Mr. Kozma: That's correct.

Mr. Haynes: Your Honor, Fred Haynes for the govern-

ment.

The only disagreement I have with what Mr. Kozma

said is that we agreed to pay--and obviously, I would

prefer we not get into this, but since your honor has said

we should, I am doing it.

We have agreed to pay 2.2 to Mutual--million--and

the remainder to ULLICO.

Now, they have requested that we try to arrange [sic]

four-million direct payment to Mutual. We're going to

look into that, but it has to be with the understanding

that only 2.2 million is going from us to Mutual.

I won't bore you with the reason why this is signifi-

cant, but it is significant to us. And we agreed to 2.2

million to Mutual and the remainder to ULLICO.

Mr. Kozma: We don't dispute that, your Honor.

The Court: And were no more than 2.2 million to go

from O.P.M. to Mutual, then the payment would be made

by ULLICO from the sum that it had been given.

Mr. Kozma: We will make some arrangements to get

the money--

The Court: To Mutual?

Mr. Kozma: Yes.

And I would also like to say that I have already begun

drafting a settlement agreement, which I will circulate.

It's the parties' intention to reduce all of this to a

settlement agreement that will be executed.

Because the contingency reserve fund had grown through

interest accruals, the parties were aware that the payments

to Mutual and Union Labor would not completely empty it.

On August 11, 1995, Kozma circulated a draft agreement to

all of the parties. That afternoon, counsel for the Union

called Kozma and objected to the language in paragraphs 4

and 14 of the draft.2 Paragraph 4 said: "The NAGE defen-

dants shall receive none of these funds," and paragraph 14

said:

This Agreement constitutes a full and complete release

by each of the parties in favor of each of the other

parties of all claims or liabilities that were or could have

been asserted in this action, and of all claims and liabili-

ties arising from or out of the NAGE plan, its operation

and administration from 1985 to the present, except as

set forth in this Agreement.

The Union's counsel thought this language was overbroad and

could be read to preclude the Union from seeking reimburse-

ment from the Office for an unrelated claim dealing with

expenses it incurred paying the final claims made after the

plan closed. He suggested changes that would clarify that

nothing in the settlement barred the Union from making such

a claim in the future.

__________

2 In its brief, the government disingenuously suggests that the

Union did not object to the language in the settlement agreement

until after October 12, 1995. To support this contention, the

government compares an affidavit from the Union's counsel, which

recounts the August 11 phone call, with one from Kozma making no

reference to it. The government unforgivably omits reference to

Kozma's second clarifying affidavit, in which he admits that this

phone call did occur.

Kozma, however, never communicated the Union's concerns

to the other parties. On September 20, 1995, Kozma, joined

by counsel for Mutual, wrote to the Deputy Attorney General

of the United States seeking to expedite the government's

approval of the settlement. Despite the Union's objections,

this letter stated that "by August 18, all parties had approved

the [August 11] draft except DOJ." To make matters worse,

in what Kozma later described as an "oversight," the letter

was sent to everyone involved in the suit except the Union.

Kozma said that he just hadn't thought that the Union's

concern was material. To be sure, the Union had no claims in

the suit and was not paying anyone else's claims. Indeed, it

was asked to leave the room for substantial periods during

the settlement negotiations so that counsel for all parties

other than the Union could conduct private discussions.

On October 10, all parties appeared before the district

court, and Assistant U.S. Attorney Haynes announced that he

expected final Justice Department approval by the end of the

day. Two days later, when Kozma circulated a second draft,

the Union realized that its comments had been ignored. The

Union's lawyer immediately called Kozma, who told him to

take up his problems directly with the government.

Accordingly, on October 17, the Union submitted a close-

out accounting statement to the Office requesting approxi-

mately $600,000 from the contingency reserve fund as reim-

bursement for expenses incurred during the claims run-off

period. Immediately, a furor erupted. In court that morn-

ing, Haynes said that the government had entered into the

agreement with the understanding that it could use the

remaining reserve money for other plans under the Health

Benefits Act. Counsel for the Union asserted that, as a

defendant in the suit, it did not have a claim subject to the

settlement and did not perceive the agreement to waive any

of its potential claims. The district court gave the parties a

week to sort out the conflict.

All counsel drafted affidavits setting forth their recollection

of the settlement negotiations. According to Kozma, OPM

officials had expressed concern early in the negotiations that

no close-out accounting statement had been submitted for the

NAGE plan. Yet though the statement--and any accompa-

nying request for reimbursement--remained outstanding, the

government made no attempt to secure a waiver from the

Union. Haynes admitted that he did not "specifically recall"

the Union agreeing to a waiver. He nevertheless insisted

that the Office had perceived itself to be entering a "global

settlement." The government's self-serving perception ap-

pears to be based more on wish fulfillment (and fear of

embarrassment) than on hard facts. As Kozma explained,

"The settlement discussions concerned only the claims made

in this action. At no time did the NAGE defendants mention

any new claim against the contingency reserve. Conversely,

at no time did the OPM defendants request a release from

any party going beyond the claims made in this action."

Similarly, counsel for Mutual said, "At all times, the settle-

ment discussions concerned only the resolution of claims that

had been brought in this lawsuit ... [a]t no time did the

settlement discussions ever concern the release of claims that

had not been brought and could not have been brought in this

lawsuit regarding the NAGE Plan's contingency reserve."

Counsel for both insurance companies agreed that the Un-

ion's claim could not have been brought in this lawsuit

because it would have been subject to the Contract Disputes

Act, which deprives district courts of jurisdiction over certain

contract claims against the federal government.

Mutual and Union Labor filed a joint motion to enforce the

settlement agreement, and the district court ordered the

Union to show cause why it should not be bound. On

December 12, 1995, the district court issued an order (drafted

by Mutual and adopted wholesale) enforcing the settlement

and "extinguishing" the Union's claims. In this order, the

court found that the Union's silence regarding its claim

"estopped" it from asserting that it did not agree to the

settlement. When it finally ruled on the Union's motion to

amend the judgment--two years later--the court, clarifying

its earlier order, said that the language of estoppel did not

mean that the Union had consented to the contract. The

following interchange took place between the government's

counsel and the district court:

Mr. Haynes: Your Honor, I interpreted your estoppel

language as being--as falling in that area of contract law

where they say that you can be bound to a contract by

silence--by conduct. We certainly argue that they were

bound to the settlement.

The Court: That is an argument for you to make before

O.P.M.

Mr. Haynes: Well, I can tell you, Your Honor, that

O.P.M. is not going to pay their claim, because it's our

view that we entered into a global settlement. And I

think we went through this. I don't want to go over

what we have been through, but we thought we had a

global settlement. Now, they are trying to carve out

their part of it so that we end up the loser, because we

paid out $17,500,000.00 to the plaintiffs on the assump-

tion that we would get the rest of it. Now they come to

us, after the agreement is reached, and say, "No, you

don't get that. You have to give us a good part of it."

So we feel as though there was an agreement. They

are bound by their silence--by their conduct, and that

Your Honor correctly extinguished their claims, but on

the basis that they were part of the contract.

Thank you, Your Honor.

The Court: But I did not find that they were a party to

the contract. (Emphasis added.)

II.

This is an extraordinary case. The government fiercely

defends the district court's determination that the Union is

bound to the settlement, but does not produce any evidence

or real legal theory to support its claims. Although the

government reiterates the "view" of its counsel below that it

entered into a "global settlement," which presumably picked

up the Union through its gravitational pull, we gained the

impression that the government believes the Union is also

guilty of l%22ese majest%21e because the government's lawyers were

not told of the Union's objections until after the Assistant

United States Attorney had received the Deputy Attorney

General's blessing of the settlement. Consistent with its

global settlement claim, the government contends that there

can be no agreement between it and the insurance companies

if the Union prevails. The insurance companies, for their

part, treat the Union like the proverbial skunk at the garden

party, but insist that whatever happens to the Union, the

government is bound.

Recognizing that the district judge did not find it a party to

the settlement agreement (and discounting the estoppel no-

tion as without legal support), the Union reasons that the

district court's determination must have been a ruling on the

merits of its claim against the contingency reserve. It argues

that the district court lacked subject matter jurisdiction to

make that determination because the Union's claim is covered

by the Contract Disputes Act. The government does not

dispute that the Contract Disputes Act, see 41 U.S.C. s 602(a)

(1994), would apply to any claim arising under the NAGE

policy. Such claims can only be resolved by the "contracting

officer," id. s 605(a) (1994), and appealed to either an agency

board of contract appeals or the United States Court of

Federal Claims. Id. s 606 (1994); s 609 (1994).

The Union's jurisdictional argument raised for us the ques-

tion whether the district court lacked jurisdiction over the

entire case. If the insurance companies' claims are predicat-

ed on the Union's policy, they too might be covered by the

Contract Disputes Act. We asked the parties to address this

issue at oral argument (but had little success), and Mutual

submitted a supplementary brief which has left us even more

uncertain as to whether the district court had jurisdiction

over the insurance companies' complaints. Without it, the

court may not have had authority to enter an order enforcing

the settlement agreement. In Kokkonen v. Guardian Life

Insurance Co. of America, 511 U.S. 375 (1994), the Supreme

Court held that a district court had no power to enforce a

settlement agreement after it had completely dismissed the

underlying suit. That case at least implies that district courts

cannot enforce settlement agreements without some basis for

jurisdiction of the underlying suit--which is merely a specific

application of the long-standing rule that "[w]ithout jurisdic-

tion the court cannot proceed at all in any cause." Ex parte

McCardle, 74 U.S. (7 Wall.) 506, 514 (1869). See also Steel

Co. v. Citizens for a Better Env., 118 S. Ct. 1003, 1016 (1998)

("Hypothetical jurisdiction produces nothing more than a

hypothetical judgment--which comes to the same thing as an

advisory opinion....")

In its supplemental brief, Mutual argued in a conclusory

fashion that both of the insurance companies' complaints are

really administrative challenges to the Office's interpretation

of its own rules and the Health Benefits Act. But this

characterization is not determinative, for "a plaintiff may not

avoid the jurisdictional bar of the [Contract Disputes Act]

merely by alleging violations of regulatory or statutory provi-

sions rather than breach of contract." Ingersoll-Rand Co. v.

United States, 780 F.2d 74, 77 (D.C. Cir. 1985). Nor would

the Health Benefits Act confer jurisdiction on the court if the

complaints indeed turn on contract. A section of that Act

does provide that "[t]he district courts of the United States

have original jurisdiction, concurrent with the United States

Court of Federal Claims, of a civil action or claim against the

United States founded on this chapter." 5 U.S.C. s 8912

(1994) (emphasis added). But an action founded on contract

is not "founded on this chapter." Cf. 28 U.S.C. s 1346(a)(2)

(1994) (depriving district courts of jurisdiction over claims

against the United States "founded upon any express or

implied contract" with the United States that is subject to

the Contract Disputes Act) (emphasis added). What matters

is the source of the right at stake. As we said in Ingersoll-

Rand, "determining whether an action is founded upon a

contract ... 'depends both on the source of the rights upon

which the plaintiff bases its claims, and upon the type of relief

sought (or appropriate).' " 780 F.2d at 76 (quoting Mega-

pulse, Inc. v. Lewis, 672 F.2d 959, 968 (D.C. Cir. 1982)).

We think the best course, given our uncertainty as to the

nature of the insurance companies' original claims, is to

remand the case to the district court so that it can make an

explicit determination as to its jurisdiction over the insurance

companies' suits against the government. (It is of course

possible that even if the district court lacked jurisdiction the

settlement agreement would be enforceable in some tribunal.)

But we think the Union is entitled to escape this mess. The

district court expressly found that it was not a party to the

settlement, and we cannot imagine how the Union could be

otherwise "estopped" from pursuing its claim (nor, for that

matter, how it could even be criticized for its behavior). We

thus agree with the Union that the district court's order

should be construed as reaching the merits of its claim

against OPM--which it clearly lacked jurisdiction to do. Ac-

cordingly, we direct that the district court's order be vacated

and the case remanded to determine whether the settlement

can be enforced as to the parties other than the Union.

So ordered.