Granite Reinsurance Company, Ltd v. Frohman

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF NEBRASKA

GRANITE REINSURANCE )

COMPANY, LTD, A Barbados )

Corporation, )

)

Plaintiff, ) 8:08CV410

)

v. )

)

ANN M. FROHMAN, Director of ) MEMORANDUM AND ORDER

Insurance, in her capacity as )

Liquidator of, FEDERAL CROP )

INSURANCE CORPORATION, a )

Corporation within the United States )

Department of Agriculture, and RISK )

MANAGEMENT AGENCY, an )

agency of and within the United )

States Department of Agriculture, )

)

Defendants. )

The plaintiff’s complaint, originally filed in the District Court of Lancaster

County, Nebraska on August 18, 2008, (filing no. 1-2), was removed to this forum on

September 17, 2008, by defendants United States Department of Agriculture

(“USDA”), Federal Crop Insurance Corporation (“FCIC”), and Risk Management

Agency (“RMA”)(collectively referred to hereafter as “RMA/FCIC”). Filing No. 1.

The notice of removal states removal is proper: 1) under 28 U.S.C. § 1442(a)(1)

because the plaintiff’s complaint seeks damages against a federal agency for actions

taken under color of office; and 2) under 7 U.S.C. § 1506(d) because the federal

district court has exclusive jurisdiction over actions by or against the FCIC and RMA.

Filing No. 1, at p. 2.

Plaintiff, Granite Reinsurance Company, LTD (“Granite”), and defendant Ann

Frohman, Director of the Nebraska Department of Insurance, (“Director”) have filed

motions to remand. Filing Nos. 9 & 13.1 Granite and the Director argue remand is

required because the dispute at issue involves collection of alleged unpaid premiums

owed by an insolvent insurer, American Growers Insurance Company (“”Growers”);

Grower’s liquidation and receivership proceedings are now pending in the District

Court of Lancaster County, Nebraska;2 and the receivership court has exclusive

jurisdiction over Granite’s claims pursuant to the Nebraska Insurers Supervision,

Rehabilitation and Liquidation Act (“Nebraska Receivership Act”),(Neb. Rev. Stat.

§44-4801 et seq), and the McCarran-Ferguson Act, (15 U.S.C. § 1011 et seq).

Granite and the Director further argue the federal court should abstain from

exercising jurisdiction over the parties’ controversy. Granite also argues RMA/FCIC

voluntarily submitted to the jurisdiction of the Lancaster County District Court by

filing of a Proof of Claim and actively participating in the state receivership

proceedings for Grower’s liquidation.

In response, RMA/FCIC claims it has sovereign immunity except to the extent

that immunity is waived by statute, and since the only statute authorizing suit against

the FCIC, 7 U.S.C. § 1506, vests exclusive original jurisdiction in the federal district

courts, this case must be litigated in federal court. RMA/FCIC states filing a Proof

of Claim in state court does not waive its sovereign immunity or serve to vest

1

The court notes all defendants did not join in removal. However, removals

under the federal officer/agency removal statute, (28 U.S.C. § 1442(a)(1)), are

excepted from the general “rule of unanimity.” Akin v. Ashland Chemical Co., 156

F.3d 1030, 1034 (10th Cir. 1998)(collecting cases). It is well settled that “removal

under 28 U.S.C. § 1442 can be effected by any defendant in an action, with or without

the consent of co-defendants.” Alsup v. 3-Day Blinds, Inc., 435 F.Supp.2d 838, 842

(S.D. Ill. 2006)(collecting cases). See also, Hilbert v. McDonnell Douglas Corp., 529

F.Supp.2d 187, 195 (D. Mass. 2008).

2

District Court of Lancaster County, Nebraska, case number CI05-714.

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jurisdiction in the state court, and the McCarran-Ferguson does not provide state

courts with jurisdiction over the United States government. Finally, RMA/FCIC

argues the action filed by Granite and now pending in this forum violates Nebraska

statutory law and the Order of Liquidation, Declaration of Insolvency and Injunction

for Grower’s state liquidation proceedings. In the liquidation proceedings, the

Director filed a Motion to Show Cause why Granite should not be held in contempt

for filing this lawsuit. That motion has been pending since October 17, 2008. Filing

No. 37-2, ¶ 5, and at CM/ECF p. 7-11.

The Plaintiff’s Complaint

The plaintiff’s complaint seeks a judgment against the Director and RMA/FCIC

to recover premiums allegedly owed to Granite for a reinsurance policy it issued to

Growers for crop insurance losses. The complaint alleges as follows:

Pursuant to 7 U.S.C. § l507(c), RMA/FCIC contracted with Growers, a private

insurance company, to offer Multi-Peril Crop Insurance (“MPCI”) policies to

producers of agricultural commodities. The parent company of Growers is

Acceptance Insurance Company, Inc. (AICI). Filing No. 1-2, ¶¶ 2, 12, 14.

As a prerequisite for allowing Growers to sell RMA/FCIC-approved crop

insurance policies, Growers was required to purchase reinsurance coverage for any

potential catastrophic crop losses that fell in the 140% to 150% of premium layer.

Filing No. 1-2, ¶15. Granite alleges that to fulfill this requirement, Growers, AICI,

and AICI’s affiliate, Acceptance Insurance Company, (“AIC”), purchased a MPCI

Stop Loss Reinsurance Contract from Granite in 2001 (hereinafter the “Reinsurance

Contract”). Under the terms of the Reinsurance Contract, the insured was obligated

to pay a total of $15 million in premiums for reinsurance of crop losses for the five

crop years beginning on July 1, 2000 and ending on June 30, 2005. The $6 million

premium due at the outset of the Reinsurance Contract was paid by Growers.

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However, the three remaining $3 million premium payments owed on January 1,

2003, January 1, 2004, and January 1, 2005, were not paid. Filing No. 1-2, ¶¶ 14, 16.

On November 22. 2002, the Director placed Growers under an Order of

Supervision. Filing No. 1-2, ¶9.

As of December 5, 2002, when it appeared Growers was facing severe financial

problems and would soon be placed in receivership, FCIC and the Director entered

into a Memorandum of Understanding (“MOU”)(filing no. 1-2, at CM/ECF pp. 9-16).

Under the terms of the MOU, FCIC agreed to:

Assume the responsibility for any contingent liabilities of American

Growers or Acceptance Insurance Company that arise under the 2002

and prior reinsurance years reinsurance agreements that remain unpaid

at the time it is determined that such obligations are owing and

American Growers or Acceptance Insurance Company, as applicable, is

unable to perform its obligations.

Filing No. 1-2, ¶ 29, and at CM/ECF p. 12, ¶ 6. “Contingent liabilities” is defined

under the MOU as “. . . the liability associated with any arbitrations or litigations

arising from the 2001 or prior reinsurance years on FCIC reinsured policies.” Filing

No. 1-2, ¶ 30, and at CM/ECF p. 10.

The District Court of Lancaster County, Nebraska entered an Order of

Rehabilitation for Growers on December 20, 2002. Filing No. 14-2, at CM/ECF p.

2, ¶ 3. Thereafter, in accordance with the terms MOU, FCIC received all or

substantially all the funds and other assets of Growers in exchange for paying various

costs owed by Growers. FCIC did not, however, pay the unpaid premiums allegedly

owed to Granite on the Reinsurance Contract. Filing No. 1-2, ¶¶ 32-34.

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AICI filed for Chapter 11 bankruptcy protection on January 7, 2005. Granite

filed a Proof of Claim in the bankruptcy proceeding to recover the unpaid premiums

owed on the Reinsurance Contract on May 6, 2005. Filing No. 1-2, ¶¶ 18-19.

Pursuant to the Nebraska Insurers Supervision, Rehabilitation and Liquidation

Act ("Act''), (Neb. Rev. Stat. §44-4801 et seq), the Lancaster County District Court

entered an Order of Liquidation with respect to Growers on February 28, 2005.

Filing No. 14-2. RMA/FCIC filed a Proof of Claim in Growers’ receivership

proceedings. Filing No. 1-2, ¶8.

On September 22, 2005, Granite filed a complaint against AIC in the United

States District Court for the District of Nebraska to recover the unpaid premiums on

the Reinsurance Contract, (Granite v. Acceptance Insurance, Inc.,

8:05CV00449-TDT). The Granite/AIC lawsuit was referred to the bankruptcy court

on January 23, 2006. (8:05CV00449-TDT, filing no. 16). AIC filed a complaint

against Granite on October 26, 2006 to recover the $6 million premium paid by

Growers to Granite. On December 5, 2006, the bankruptcy court consolidated the

suit against AIC, the claim by AICI and the objection to that claim, and the AIC claim

against Granite. Filing No. 1-2, ¶¶ 20-22.

A trial was held in the bankruptcy court in February 2007, and on May 9, 2007,

the bankruptcy court held that AICI, AIC, and Growers were all parties to the

Reinsurance Contract, but AIC and AICI were not responsible for the $9 million

premium balance owed to Granite. This decision was reversed by the Bankruptcy

Appellate Panel (“BAP”) for the Eighth Circuit Court of Appeals. The BAP held the

Reinsurance Contract was not voided by the fact that Growers was now in a Nebraska

receivership, and AIC and AICI remained liable to Granite for payment of the $9

million of unpaid premiums. The BAP accordingly entered judgment in favor of

Granite. The BAP ruling was appealed to the Eighth Circuit Court of Appeals, and

that appeal remains pending. Filing No. 1-2, ¶¶ 23-27.

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Granite’s complaint was filed against the Director and RMA/FCIC requests

an order directing the FCIC to pay the Director the funds needed to pay Granite for

the unpaid Reinsurance Contract premiums, and directing the Director to, in turn, pay

those funds to Granite. Filing No. 1-2, at CM/ECF p. 8.

For the reasons discussed hereafter, the motions for remand filed by Granite

and the Director, (filing nos. 9 & 13), will be denied.

Legal Analysis

The government claims removal is proper under two statutes: 28 U.S.C. §

1442(a)(1), and 7 U.S.C. § 1506(d).

Under 28 U.S.C. § 1442(a)(1), a civil action filed in state court against “the

United States or any agency thereof or any officer (or any person acting under that

officer) of the United States or of any agency thereof, sued in an official or individual

capacity for any act under color of such office” may be removed to the district court

of the United States for the district where the state case is pending. 28 U.S.C. §

1442(a)(1).3 The purpose of 28 U.S.C. § 1442(a)(1) is to protect the exercise of

legitimate federal authority against interference by individual states through their

courts. Watson v. Philip Morris Companies, Inc., 551 U.S. 142, 150 (2007). The

right of removal “is absolute for conduct performed under color of federal office,”

and “the policy favoring removal should not be frustrated by a narrow, grudging

interpretation of 1442(a)(1).” Arizona v. Manypenny, 451 U.S. 232 (1981).

3

Although Int'l Primate Protec. League v. Administrators of Tulane Educ. Fund,

500 U.S. 72 (1991), held the right to removal under 28 U.S.C. § 1442 belonged only

to federal officers and not the agency itself, the 1996 amendments to § 1442

effectively overruled Int'l Primate by granting removal rights to federal agencies.

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FCIC is an agency of the United States, created under the Federal Crop

Insurance Act (“FCIA”), (7 U.S.C. §§ 1501 et seq.), and administered through the

Department of Agriculture. Pursuant to 7 U.S.C § 1506(d), “[t]he district courts of

the United States . . . shall have exclusive original jurisdiction, without regard to the

amount in controversy, of all suits brought by or against” the FCIC. 7 U.S.C. §

1506(d). The RMA administers the FCIA, and the FCIC is a division within the

RMA. Accordingly, the provisions of 7 U.S.C. § 1506(d), including its jurisdiction

and venue provisions, apply to both the FCIC and the RMA. Acceptance Ins.

Companies, Inc. v. U.S., 72 Fed. Cl. 299, 304 (Fed. Cl. 2006)(citing Rain & Hail Ins.

Serv., Inc. v. Fed. Crop Ins. Corp., 229 F. Supp.2d 710, 715 (S.D. Tex. 2002)).

Granite and the Director claim RMA/FCIC’s right to removal under 28 U.S.C.

§ 1442(a)(1) is reversed preempted by the McCarran-Ferguson Act, (15 U.S.C. §

1011 et seq). Pursuant to 15 U.S.C. § 1012 of the McCarran-Ferguson Act:

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, or which imposes a fee or tax upon such business,

unless such Act specifically relates to the business of insurance. . . .

15 U.S.C.A. § 1012 (emphasis added). Granite and the Director claim the federal

court’s jurisdiction under 28 U.S.C. § 1442 is reverse preempted by the Nebraska

Receivership.

The Nebraska Receivership Act includes substantive law governing insurer

liquidation proceedings, and jurisdictional law requiring that all such suits be brought

in the Lancaster County District Court to “protect the interests of insureds, claimants,

creditors, and the public” through “[e]nhanced efficiency and economy of

liquidation,” “clarification of the law,” and “minimiz[ing] legal uncertainty and

litigation.” Neb. Rev. Stat. §§ 44-4801 (3) & (7) & 44-4804. Citing numerous prior

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decisions of this court as either persuasive or distinguishable,4 Granite and the

Director claim removal of this case for resolution in the federal court will “invalidate,

impair, or supersede” Nebraska’s statutes “regulating the business of insurance. . . .”

in violation of the McCarren-Ferguson Act, 15 U.S.C. § 1012(b).

“[T]he McCarran-Ferguson Act reflects a strong federal policy of deferring to

state regulation of the insurance industry, including insolvency statutes.” Murff v.

Professional Medical Ins. Co., 97 F.3d 289, 292 (8th Cir. 1996)(Internal citations and

quotation marks omitted). The underlying policy of affording state courts exclusive

jurisdiction over insurer insolvency actions is to eliminate the risk of unequal

treatment of claimants or conflicting rulings in different forums. Munich American

Reinsurance Co. v. Crawford, 141 F.3d 585, 593 (5th Cir. 1998); Davister Corp. v.

United Republic Life Ins. Co., 152 F.3d 1277 (10th Cir. 1998).

However, the McCarran-Ferguson includes a significant exception which was

neither applicable nor discussed in this court’s prior rulings. Unlike Granite’s

complaint, in the prior Nebraska federal district court cases cited by Granite and the

Director, none of the parties was a federal agency charged with implementing a

4

See, Amwest Sur. Ins. Co. v. Swiss Reinsurance America Corp., 2004 WL

628217, 1 (D.Neb. 2004)(Bataillon, J., presiding); Amwest Sur. Ins. Co. v. J.A. Jones

Const. Co., 245 F.Supp.2d 1038 (D. Neb. 2002)(Piester, MJ, presiding); Lecher

Zapata v. Amwest Surety Ins Co, et al, 4:99CV03302, (D.C.Neb.)(Strom, J.,

presiding); Wagner v. Bank of America, 8:02CV00195, (D.C. Neb.)(Shanahan, J.,

presiding); Wagner v. J.A. Jones Construction Co., 4:02CV3161, (D.C.Neb.)(Kopf,

J., presiding); Wagner v. Allenbrooke Insurance Services, Inc., 4:03cv3007,

(D.C.Neb.)(Kopf, J., presiding).

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federal insurance program. The McCarran-Ferguson Act expressly does not apply,

and therefore state law does not preempt, federal enactments specifically relating to

the business of insurance.

The FCIA, which creates and governs the FCIC, includes provisions outlining

the substance and method of providing federal crop insurance. The FCIC is

authorized by Congress to implement a federal crop insurance program, either by

directly entering into insurance contracts with producers of agricultural commodities

(id. § 1508(a)), or by reinsuring crop insurance contracts between producers and

private insurance companies. Id. § 1508(k). The FCIA also grants the federal courts

exclusive jurisdiction over disputes by and against the FCIC.

Granite’s lawsuit names RMA/FCIC as a defendant and claims a right to

recover unpaid premiums for issuance of a crop reinsurance policy to an FCIC-

approved insurer, (Growers), pursuant to the terms of an MOU between the FCIC and

the Director. In other words, FCIC, a federal agency, and its supervisory agency, the

RMA, are being sued for acts committed while carrying out the federal crop insurance

program. When Congress created federal crop insurance, it specifically intended to

provide a uniform and accessible system of farmer protection. It did not intend “to

allow fifty states to administer that program according to fifty different state

insurance regulatory schemes.” In re 2000 Sugar Beet Crop Ins. Litigation, 228 F.

Supp. 2d 992, 997 (D. Minn. 2002), (rev’d on other grounds), National Crop Ins.

Services, Inc. v. Federal Crop Ins. Corp., 351 F.3d 346 (8th Cir. 2003).

Although Nebraska law grants the District Court of Lancaster County exclusive

jurisdiction over insurer insolvency actions, this state law directly conflicts with the

FCIA’s grant of exclusive jurisdiction over claims against the FCIC in the federal

district courts. The FCIA “specifically relates to the business of insurance,” (15

U.S.C.A. § 1012), and therefore, under the exception set forth in the McCarran-

Ferguson Act, the FCIA, including its jurisdiction and venue provisions, is not

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reverse preempted by Nebraska’s insurance insolvency law. State of Kan. ex rel.

Todd v. U.S., 995 F.2d 1505 (10th Cir. 1993); In re 2000 Sugar Beet Crop Ins.

Litigation, 228 F. Supp. 2d at 997. See also, Masoner v. First Community Ins. Co.,

81 F.Supp.2d 1052, 1057 n. 3 (D. Idaho 2000)(noting the McCarran-Ferguson Act

does not preclude application of the provisions of the National Flood Insurance Act).

Pursuant to the FCIA, the federal district court has exclusive original jurisdiction over

Granite’s action gainst the FCIC.

Granite claims, however, that by filing of a Proof of Claim and actively

participating in the Grower’s state receivership proceedings, RMA/FCIC voluntarily

submitted to the jurisdiction of the District Court of Lancaster County. “It has long

been settled that officers of the United States possess no power through their actions

to waive an immunity of the United States or to confer jurisdiction on a court in the

absence of some express provision by Congress.” U.S. v. N.Y. Rayon Importing Co.,

329 U.S. 654, 660 (1947); Goodin v. U.S. Postal Inspection Service, 444 F.3d 998,

1002 (8th Cir. 2006)(holding failure to issue a denial letter cannot create jurisdiction

by waiver or estoppel). Therefore, RMA/FCIC did not, and could not by its

statements, acts, or omissions, grant to the District Court of Lancaster County subject

matter jurisdiction over Granite’s claims.

RMA/FCIC was entitled to remove this case to federal court pursuant to 28

U.S.C. § 1442(a)(1), the only forum which can exercise jurisdiction over claims filed

against the FCIC, and the RMA in its capacity as the FCIC’s supervising agency. 7

U.S.C. § 1506(d). The District Court of Lancaster County, Nebraska never had

jurisdiction over Granite’s action against RMA/FCIC, and remand to the state forum

would be improper. Leach v. Federal Crop Ins. Corp., 741 F.2d 200 (8th Cir. 1984);5

5

Leach further held that since the state court lacked jurisdiction, the federal

court could not acquire jurisdiction on removal. However, subsequent to Leach, 28

U.S.C. § 1441 was amended to include the following:

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Farmers Crop Ins. Alliance v. Laux, 442 F. Supp. 2d 488, 498 (S.D. Ohio

2006)(holding the FCIA confers exclusive federal jurisdiction over lawsuits against

the RMA and FCIC). See also, Texas Peanut Farmers v. U.S., 409 F.3d 1370 (D.C.

Cir. 2005 (holding the federal district court, not the Court of Federal Claims, has

exclusive subject matter jurisdiction over action involving reinsurance owned by the

FCIC).

Granite and the Director argue that even if the federal court has subject matter

jurisdiction, it should abstain from exercising that jurisdiction under Burford v. Sun

Oil Co., 319 U.S. 315 (1943). “As a general rule, abstention is appropriate where a

state creates a complex regulatory scheme, supervised by the state courts and central

to state interests[,] if federal jurisdiction deals primarily with state law issues [,] or

if federal jurisdiction will disrupt a state's efforts to establish a coherent policy with

respect to a matter of substantial public concern.” Melahn v. Pennock Ins., Inc., 965

F.2d 1497, 1503 (8th Cir. 1992) (omitting internal citations and quotation marks).

However, abstention is “the exception, not the rule.” Id.

The doctrine of abstention, under which a District Court may decline to

exercise or postpone the exercise of its jurisdiction, is an extraordinary

and narrow exception to the duty of a District Court to adjudicate a

controversy properly before it. Abdication of the obligation to decide

cases can be justified under this doctrine only in the exceptional

The court to which a civil action is removed under this section is not

precluded from hearing and determining any claim in such civil action

because the State court from which such civil action is removed did not

have jurisdiction over that claim.

28 U.S.C. § 1441(f). Under § 1441(f), removal is no longer considered “derivative”

of state court jurisdiction, and a case falling within exclusive federal jurisdiction, but

filed in state court, can be removed to federal district court.

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circumstances where the order to the parties to repair to the State court

would clearly serve an important countervailing interest.

Melahn, 965 F.2d at 1503-04.

When Congress has directed that federal courts have not only jurisdiction, but

exclusive jurisdiction over a particular type of claim, abstention to permit

adjudication of the entire case in a state forum would defeat the purpose of the federal

legislation.” Key v. Wise, 629 F.2d 1049, 1059 (5th Cir. 1980). Simply sated,

“abstention is clearly improper when a federal suit alleges claims within the exclusive

jurisdiction of the federal courts.” Andrea Theatres, Inc. v. Theatre Confections, Inc.,

787 F.2d 59, 62 (2d Cir. 1986). If the state court lacks broad, concurrent jurisdiction

to adjudicate the claims asserted in the parties’ pleadings, abstention may result in

piecemeal adjudication of the case. Id. Therefore, a federal court also has no

discretion to stay proceedings as to claims within the court’s exclusive federal

jurisdiction while awaiting the outcome of other claims in state court. Medema v.

Medema Builders, Inc., 854 F.2d 210, 213 (7th Cir. 1988); Silberkleit v. Kantrowitz,

713 F.2d 433, 436 (9th Cir. 1983).

Granite’s complaint was properly removed to this forum and will not be

remanded. This court will not abstain from litigating Granite’s claims, and will not

stay this case pending the outcome of the state liquidation proceedings or any rulings

of the District Court of Lancaster County, Nebraska.

In response to the pending motions to remand, the government argues this

litigation should be transferred to the United States District Court for the District of

Columbia. Pursuant to 7 U.S.C. § 1506(d), “[a]ny suit against the [FDIC] shall be

brought in the District of Columbia, or in the district wherein the plaintiff resides or

is engaged in business.” 7 U.S.C. § 1506(d). The foregoing provision addresses

venue, not subject matter jurisdiction, and venue often requires a factual inquiry.

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Crop Hail Management v. Federal Crop Insurance Corp., 1994 WL 1890927, 2 (N.D.

Miss. 1994); Cohen v. Commodity Credit Corp., 172 F.Supp. 803, 806 (D.C. Ark.

1959). The motions for remand filed by Granite and the Director addressed only

subject matter jurisdiction, which is usually decided on the face of the pleadings.

Therefore, the court will not currently decide the venue issue. If a motion is filed for

change of venue, the court will resolve the issue after affording all parties an

opportunity to respond.

Accordingly,

IT IS ORDERED:

1) The motions to remand, or in the alternative to abstain or stay this

lawsuit, filed by plaintiff Granite Reinsurance Company, LTD, and

defendant Ann Frohman, Director of the Nebraska Department of

Insurance, (filing nos. 9 & 13), are denied.

2) To the extent the government’s response on the motions for remand

requests transfer of this action to the United States District Court for the

District of Columbia, the request is denied without prejudice to

consideration upon a properly filed and fully submitted motion to

transfer venue.

DATED this 17th day of August, 2009.

BY THE COURT:

Richard G. Kopf

United States District Judge

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