State Farm Life Insurance Comp v. Troy Jonas, et al
Filing
Filed opinion of the court by Judge Easterbrook. The judgment of the district court is VACATED, and the case is REMANDED with instructions to dismiss for lack of subject matter jurisdiction. Joel M. Flaum, Circuit Judge; Frank H. Easterbrook, Circuit Judge and Michael S. Kanne, Circuit Judge. [6631513-1] [6631513] [14-1464]
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Case: 14-1464
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In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 14-‐‑1464
STATE FARM LIFE INSURANCE COMPANY,
Plaintiff-‐‑Appellee,
v.
TROY JONAS, et al.,
Defendants-‐‑Appellants.
____________________
Appeal from the United States District Court for the
Southern District of Indiana, Indianapolis Division.
No. 1:12-‐‑cv-‐‑1500-‐‑WTL-‐‑MJD — William T. Lawrence, Judge.
____________________
ARGUED DECEMBER 5, 2014 — DECIDED DECEMBER 31, 2014
____________________
Before FLAUM, EASTERBROOK, and KANNE, Circuit Judges.
EASTERBROOK, Circuit Judge. Troy Jonas and his wife Jen-‐‑
nifer purchased reciprocal policies of life insurance: she
owned the policy on her life, with him as beneficiary; he
owned the policy on his life, with her as beneficiary. When
they divorced in 2011, the court reassigned the policies’
ownership: after the divorce, Troy owned the policy on Jen-‐‑
nifer’s life. Each policy provided that “[a] change of Owner
or Successor Owner does not change the Beneficiary Desig-‐‑
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nation.” Troy therefore thought it unnecessary to redesig-‐‑
nate himself as the beneficiary of the policy insuring Jen-‐‑
nifer’s life.
Jennifer died on August 30, 2012. Troy promptly submit-‐‑
ted a claim for the proceeds ($1 million). State Farm Life In-‐‑
surance did not pay. It expressed concern that the proceeds
might belong to the couple’s children (who had been named
as secondary beneficiaries) or to Jennifer’s estate as a result
of Tex. Family Code §9.301, which provides that if a divorce
occurs after one spouse has designated the other spouse as a
beneficiary of an insurance policy, the designation lapses
(with some exceptions) and, unless a new designation is
made, the proceeds belong to any alternative beneficiary or
the decedent’s estate. (Jennifer was domiciled in Texas when
she died, and the policy had been issued there; the parties
agree that Texas law applies to this litigation.) Troy replied
that this provision does not apply when the divorce decree
reassigns the policy’s ownership to the named beneficiary.
Texas law requires an insurer to pay within 60 days of
receiving a claim, Tex. Ins. Code §542.058(a), and provides
for “damages” if payment is delayed. Damages under Tex.
Ins. Code §542.060 are interest at 18% a year plus reasonable
attorneys’ fees that the claimant incurs in collecting. But an
insurer that receives “notice of an adverse, bona fide claim”
within 60 days of the initial claim may defer payment and
properly file an interpleader action and tender the benefits into
the registry of the court not later than the 90th day after the date
the insurer receives [the initial claim]. A life insurer that delays
payment of the claim or the filing of an interpleader and tender
of policy proceeds for more than 90 days shall pay damages and
other items as provided by Section 542.060 until the claim is paid
or an interpleader is properly filed.
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Tex. Ins. Code §542.058(c). One final provision of Texas law
plays a role in this federal litigation. Tex. Ins. Code §1103.103
provides that if an insurer does not receive a competing
claim before it pays the policy’s designated beneficiary, it is
absolved of any liability to a later claimant, whether or not
the belated claimant had a superior entitlement to the pro-‐‑
ceeds. See also State Farm Life Insurance Co. v. Martinez, 216
S.W.3d 799, 806 n.31 (Tex. 2007).
State Farm did not receive any claim other than Troy’s.
Still, it did not pay. Instead it filed this action in federal
court, nominally as an interpleader under 28 U.S.C. §1335,
on October 16, 2012—before the 60 days had run, and well
inside the 90 days allowed by §542.058(c). But there were
two problems, one with Texas law and one with federal law.
The problem under Texas law is that State Farm had not re-‐‑
ceived “notice of an adverse, bona fide claim”. We’ll come
back to the problem under federal law.
Troy replied to State Farm’s action by asking the district
court to award him the proceeds plus 18% interest and at-‐‑
torneys’ fees. He contended that the suit was unnecessary
(State Farm not having received an adverse claim) and that
delay in payment contravened Texas law. The district court
disagreed. Relying on Clements v. Minnesota Life Insurance
Co., 176 S.W.3d 258, 263 (Tex. App. 2004), it treated State
Farm’s concern about the potential rights of the children
(and Jennifer’s estate) as equivalent to a bona fide claim ad-‐‑
verse to Troy’s. That was enough to permit State Farm to
commence an interpleader—and since it had done that with-‐‑
in 90 days of Troy’s claim, Texas law permitted it to use the
2% contractual rate of interest rather than the 18% rate under
§542.060. 2013 U.S. Dist. LEXIS 81720 (S.D. Ind. June 11, 2013),
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reconsideration denied, 2013 U.S. Dist. LEXIS 86703 (June 20,
2013). The judge ordered State Farm to remit the proceeds to
the court’s registry. State Farm complied on June 17, 2013,
and the court disbursed the money to Troy on February 6,
2014. (The record does not explain why the court held onto
the money for almost eight months.) Troy contends in this
appeal that he is entitled to recover his attorneys’ fees and
that the rate of interest should have been 18% rather than
2%, and should run until he received the money.
This brings us to the federal problem, which has implica-‐‑
tions under Texas law too. The problem is this: State Farm
did not file an interpleader under 28 U.S.C. §1335. It may
have thought that it did, but it didn’t. Section 1335 creates
jurisdiction of interpleader actions if two conditions are met.
Subsection (a)(1) specifies minimal diversity among claim-‐‑
ants, which was satisfied. (Jennifer was domiciled in Texas
on her death, so her estate also has Texas citizenship, 28
U.S.C. §1332(c)(2); Troy and the children were domiciled in
Indiana when the suit began.) Subsection (a)(2) requires the
deposit of the stakes in the district court’s registry. That
condition was not satisfied. State Farm filed a complaint but
not a check or any other financial instrument. Both parts are
jurisdictional. Section 1335(a) reads: “The district courts shall
have original jurisdiction … if (1) … and if (2) … .” State
Farm satisfied (1) but not (2), so §1335 does not provide sub-‐‑
ject-‐‑matter jurisdiction.
The consequence under Texas law is that Ins. Code
§542.058(c) drops out of the picture, for it requires an insurer
not only to file an interpleader action but also to “tender the
benefits into the registry of the court not later than the 90th
day after the date the insurer receives [the initial claim].”
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Texas may permit interpleader actions in state court based
on promises to pay rather than contemporaneous deposits,
but federal procedures govern in federal litigation, see Shady
Grove Orthopedic Associates, P.A. v. Allstate Insurance Co., 559
U.S. 393 (2010), and §1335(a)(2) requires cash on the barrel-‐‑
head. Moreover, whether or not Texas allows an interplead-‐‑
er without a cash deposit, §542.058(c) requires a deposit to
avoid damages under §542.060. This means that State Farm
cannot use the federal action to defend against Troy’s de-‐‑
mand for damages under §542.060.
Troy wants us to remand with instructions to calculate
and award attorneys’ fees and the extra interest. But we can’t
do that either. A remand with any instruction other than
dismissal depends on the existence of subject-‐‑matter juris-‐‑
diction. Section 1335 does not supply jurisdiction.
Section 1332, the general diversity statute, also must be
considered. Interpleader using the §1332 jurisdiction has
been authorized by Fed. R. Civ. P. 22, which does not require
a cash deposit. See Gelfgren v. Republic National Life Insurance
Co., 680 F.2d 79, 81–82 (9th Cir. 1982); Murphy v. Travelers In-‐‑
surance Co., 534 F.2d 1155, 1159 (5th Cir. 1976). The lack of a
deposit means that §542.058(c) remains unsatisfied, even if
we treat this action as a rule interpleader (the parties have
not done so; their briefs do not mention Rule 22), but before
considering whether we can order any relief, we must ad-‐‑
dress subject-‐‑matter jurisdiction. Complete diversity exists
(State Farm is incorporated and has its principal place of
business in Illinois; the other parties are citizens of Indiana
or Texas; the stakes exceed $75,000), but where is the contro-‐‑
versy necessary to satisfy Article III of the Constitution?
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State Farm acknowledges that it must pay the proceeds
(and interest) to someone, and Troy is the only claimant. A
genuine risk of multiple liability—being ordered to pay Troy
plus the children, or Troy plus Jennifer’s estate—could pro-‐‑
vide a justiciable controversy, but Texas law eliminates that
risk. Section 1103.103 of the Tex. Ins. Code protects insurers
that pay the named beneficiary when no one else makes a
competing claim. At oral argument, State Farm’s lawyer told
us that it was not “comfortable” relying on §1103.103, but it
is not the role of a federal court to provide comfort to liti-‐‑
gants. Federal courts resolve concrete disputes between real
adversaries, and this suit lacks such a controversy. Section
1103.103 means that State Farm has never faced a realistic
prospect of multiple liability. Compare Susan B. Anthony List
v. Driehaus, 134 S. Ct. 2334 (2014) (a “credible threat” of lia-‐‑
bility creates a justiciable controversy), with Steffel v. Thomp-‐‑
son, 415 U.S. 452, 459 (1974) (an “imaginary or speculative”
risk of liability does not).
Troy takes a different position. He concedes that there
was no justiciable controversy when the suit was filed—not
even one about the rate of interest, since State Farm filed the
suit before the 60th day after his claim, and thus before the
rate of interest stepped up from 2% to 18%. But he contends
that once the 60th day passed a controversy arose about
whether State Farm is liable under §542.060. The problem
with that contention is that a case or controversy must exist
when a suit begins—and on that date there was no live con-‐‑
troversy. If disputes about attorneys’ fees and interest during
the litigation could create a justiciable controversy, then no
case could be dismissed for lack of one, if only because the
winner of every suit is presumptively entitled to costs under
28 U.S.C. §1920.
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Several times the Supreme Court has encountered the
contention that a dispute about the allocation of costs, attor-‐‑
neys’ fees, or other post-‐‑filing expenses justifies adjudication
of a suit that is otherwise not within federal jurisdiction. For
example, in Diamond v. Charles, 476 U.S. 54 (1986), an inter-‐‑
venor who had been ordered to pay the prevailing side’s le-‐‑
gal fees contended that this kept the controversy alive, even
though the only litigants with standing had dropped out,
since if the judgment were reversed on the merits the award
of fees would fall with it. The Justices held, however, that
awards of legal fees and other post-‐‑filing procedural events
could not supply a case or controversy. 476 U.S. at 68–71.
The Court followed up by holding that a litigant cannot
sidestep the need for a controversy on the merits by bringing
suit for the costs of bringing suit. Steel Co. v. Citizens for a Bet-‐‑
ter Environment, 523 U.S. 83, 107 (1998). See also Lewis v. Con-‐‑
tinental Bank Corp., 494 U.S. 472 (1990).
When this litigation began, there was no justiciable con-‐‑
troversy. The current disputes about the rate of interest and
whether State Farm must pay the attorneys’ fees that Troy
has incurred in this litigation do not retroactively create ju-‐‑
risdiction. Troy must turn to state court in order to seek any
further award—though we hope that what we have said in
this opinion will enable the parties to settle.
The judgment of the district court is vacated, and the case
is remanded with instructions to dismiss for lack of subject-‐‑
matter jurisdiction.
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