In the

United States Court of Appeals

For the Seventh Circuit ____________

No. 02-2114

CAROLYN SMITH,

Plaintiff-Appellant,

v.

AMERICAN GENERAL LIFE AND

ACCIDENT INSURANCE COMPANY, INC.,

Defendant-Appellee.

____________

Appeal from the United States District Court

for the Northern District of Illinois, Eastern Division.

No. 99 C 3743—Joan Humphrey Lefkow, Judge.

____________

ARGUED JANUARY 13, 2003—DECIDED JULY 24, 2003

____________

Before POSNER, KANNE, and DIANE P. WOOD, Circuit

Judges.

DIANE P. WOOD, Circuit Judge. Carolyn Smith purchased life insurance policies for her three children from

an agent selling insurance door-to-door for American General Life and Accident Insurance Company. When one of

her children died of complications from sickle cell anemia,

American General refused to issue the full $15,000 benefit

that Smith anticipated receiving on her policy. Instead

Smith received $7,500 (a portion of this amount was

paid directly to the funeral home to which Smith assigned her claim) and was told that her original policy had

lapsed and was substituted by a policy that carried higher
2 No. 02-2114

premiums and half the benefit. After retaining a lawyer

to help her sort out the problem, Smith was eventually

paid an additional $7,500 plus interest, thereby collecting

the full $15,000 benefit under her original policy. She

then sued American General in state court alleging common law and statutory fraud in addition to vexatious

delay under the Illinois Insurance Code, hoping to recover $36.54 in excess premium payments, $2,500 that she

paid her lawyer to recover the second half of her benefits,

attorneys fees for her statutory fraud and vexatious delay

claims, and over $1,000,000 in punitive damages.

American General removed the case to federal court, and

on cross-motions for summary judgment the district court

granted partial summary judgment to American General.

Eager to appeal that decision to this court, Smith passed

up the opportunity to try her surviving fraud claims

and stipulated that she could not establish damages at

trial on what remained of her claims, despite the district court’s suggestion to the contrary. The case was then

dismissed on the court’s motion, and Smith brought this

timely appeal.

At oral argument we expressed concern that Smith’s

claim might not meet the amount in controversy requirement that is necessary to support federal jurisdiction

under 28 U.S.C. § 1332 (a) and asked the parties to file

supplemental briefs on this question. After reviewing these

filings we have concluded that the district court lacked

jurisdiction over Smith’s claim. We therefore vacate the

district court’s judgment and remand the case with instructions to remand the case to state court. See, e.g., Ross v.

Inter-Ocean Ins. Co., 693 F.2d 659, 663 (7th Cir. 1982),

abrogated on other grounds by Hart v. Schering-Plough

Corp., 253 F.3d 272, 274 (7th Cir. 2001).
No. 02-2114 3

I

In March 1991, Smith purchased life insurance for her

three children, including her son Isaac J. Smith, from a

door-to-door agent selling policies for American General.

Isaac’s policy required Smith to pay monthly premiums

of $9.85; it promised a $15,000 death benefit, payable to

Carolyn Smith, in the event of his death. Every month

Smith faithfully paid the premium on the policy to an

American General agent who came to her home, collected

the payment, and marked a receipt book that the company gave her to keep track of her monthly payments.

In September 1992, Smith cancelled the policy for another of her sons, D’Right, but she continued to pay

monthly premiums to insure her daughter Tynisa and

Isaac. The premiums for these two policies together totaled

$18.79 per month. At some time in 1996, American General’s agents stopped marking Smith’s receipt book with

each monthly payment and instead issued a computerized

receipt from a hand-held device that its agents carried.

Smith detected a problem with the first computerized

receipt, which indicated that her total premium was

$23.18 rather than $18.79, and did not include a policy

number. She expressed concern to American General’s

agent, who explained that her original policy on Isaac had

lapsed for non-payment and that the new, higher premium

was for a second policy that Smith supposedly purchased

in August 1994. Smith asked to see a copy of her application for the new policy, which a different agent showed

her on a subsequent visit to her home. According to

Smith, that policy contained her forged signature, but she

was not able to get a copy of the policy from American

General. Despite concerns over the accuracy of her

monthly premium charges and which policy was in effect,

Smith dutifully paid the revised monthly premiums on

Isaac’s policy until her son’s death in September 1997.
4 No. 02-2114

When Isaac died Smith tendered a claim to American

General for the $15,000 death benefit that she believed she

was owed under her policy. This is when Smith first learned

that the new policy carried only a $7,500 benefit, despite

the increase in monthly premiums. Smith retained a

lawyer to help her recover the difference, and this lawyer

sent a letter to American General on her behalf. In response to Smith’s lawyer’s letter, American General

explained that Smith’s policy on Isaac had lapsed and that

the current benefit was paid out under her new policy.

At that time American General asked for any information that would support a different conclusion, but it received no response from Smith or her lawyer. Nearly one

year later, a second lawyer retained by Smith (the record is silent on why she changed lawyers) responded to

American General’s letter by sending copies of handwritten and computerized receipts as proof that Smith’s

original policy never lapsed, and seeking full payment of

the $15,000 benefit. In this new round of correspondence

Smith’s lawyer urged American General to settle his client’s

claim or face a lawsuit over its conduct. That letter

and supporting documentation were then referred to the

proper department within American General for investigation, and handwriting exemplars were requested to

establish that Isaac himself had not applied for the second policy. (A second application was produced by American General containing what appears to be Isaac Smith’s

forged signature. That application contains a spelling

mistake in Isaac’s name, as well as a mistake in his social

security number.) Smith’s lawyer supplied American

General with a copy of a car loan application that Isaac

filed shortly before his death, and within four days of

its receipt of this handwriting sample, American General

paid Smith $7,500 plus interest “to reflect the amount [of

insurance] originally applied for.”

Smith’s claim against American General is not for the

balance of her insurance policy—that much she has al-
No. 02-2114 5

ready received. Instead she seeks to recover for the delay

in payment under her original insurance policy, the excess premiums that were never refunded, and the costs

she incurred in securing complete payment. Beyond these

costs Smith seeks punitive damages for what to her

seems like an inexcusable delay in payment under the

policy, as well as a major scam on American General’s

part to defraud unsophisticated customers out of their

benefits. Since Smith’s complaint seeks relief solely on

the basis of Illinois law, federal jurisdiction exists, if at

all, if the requirements of 28 U.S.C. § 1332 are met.

II

This court has an independent obligation to satisfy itself that federal subject matter jurisdiction exists before

proceeding to the merits in any case, even where, as here,

neither the parties nor the district court has questioned

the existence of such jurisdiction. St. Paul Mercury

Indem. Co. v. Red Cab Co., 303 U.S. 283, 287 n.10 (1938);

Ross, 693 F.2d at 660. To invoke the federal courts’ diversity jurisdiction, the parties must establish both complete

diversity and that the “matter in controversy exceeds

the sum or value of $75,000, exclusive of interest and

costs.” 28 U.S.C. § 1332(a). Complete diversity is not

a problem because Smith is a citizen of Illinois and American General is a Tennessee corporation with its principal

place of business in Tennessee.

The amount in controversy presents a much more difficult question. Based on language in the Supreme Court’s

decision in St. Paul Mercury, the federal courts have

adopted what is known as the “legal certainty” test

to assess whether the amount in controversy in cases

originating in federal court satisfies § 1332’s requirements. See Gardynski-Leschuck v. Ford Motor Co., 142

F.3d 955, 957 (7th Cir. 1998); 14B Charles A. Wright,
6 No. 02-2114

Arthur R. Miller & Edward H. Cooper, FEDERAL PRACTICE

& PROCEDURE § 3702, at 17 (3d ed. 1998). Under the legal

certainty test, courts will find federal jurisdiction on the

basis of the plaintiff’s complaint unless it appears “to a

legal certainty that the claim is really for less than the

jurisdictional amount.” St. Paul Mercury, 303 U.S. at 289.

But a different rule governs cases filed in state court

and subsequently removed to federal court by a defendant.

In removed cases, the amount alleged in the plaintiff’s

complaint, if sufficient to meet the jurisdictional requirements of § 1332, is presumed correct on the assumption

that a plaintiff would not fabricate the amount in controversy to meet the federal diversity jurisdiction requirements and then file her suit in state court relying on

the defendant to remove the case to federal court. Id.

at 290-91. In keeping with this presumption, our court

has adopted a rule that the removing party must establish any disputed aspect of diversity jurisdiction by offering “evidence which proves to a reasonable probability

that jurisdiction exists.” Chase v. Shop ‘N Save Warehouse

Foods, Inc., 110 F.3d 424, 427 (7th Cir. 1997) (citation and

internal quotation marks omitted).

In this case, at first blush, it looks as if the amount

could not possibly be met: apart from a request for

$1,000,000 in punitive damages, Smith wants $36.54

(excess premium benefits) + $2,500 (legal fees to recover

wrongfully withheld benefits), for a total of $2,536.54. Thus,

whether more than $75,000 is truly in controversy depends on how we must assess the demand for punitive

damages. With this in mind, we ordered the parties to

file supplemental briefs on the question of diversity jurisdiction, specifically asking that they address “whether the

amount in controversy exceeds $75,000.00 in light of

DelVecchio v. Conseco, Inc., 230 F.3d 974 (7th Cir. 2000).”

In DelVecchio, we dismissed a class action lawsuit for lack

of federal jurisdiction where the named plaintiff sought a
No. 02-2114 7

mere $600 in compensatory damages and $75,000 (coincidentally) in punitive damages. Id. at 979-80. Such a

disparate ratio of compensatory to punitive damages

struck this court as “bordering on the farcical,” and we

found it highly unlikely that a state court in Indiana (whose

law applied) would permit such an award. Id. at 980.

In their supplemental briefs, both Smith and American

General have urged this court to find that diversity jurisdiction was proper. For her part, Smith seeks to avoid

replication of costs already incurred and asks for closure

in what has certainly been an unpleasant chapter in her

life. American General too wishes to remain in federal

court; after all, it is American General that removed this

case in the first place. But the parties must do more

than show why they prefer to remain in federal court. They

must establish that jurisdiction lies in our court for resolution of their dispute. That they have not done.

As a technical matter, it is American General’s burden

to show that Smith’s complaint states a claim for more

than $75,000. In re Brand Name Prescription Drugs

Antitrust Litig., 123 F.3d 599, 607 (7th Cir. 1997) (removing party bears burden of demonstrating that amount

in controversy requirement is satisfied by presenting

“evidence of federal jurisdiction once the existence of

that jurisdiction is fairly cast into doubt”) (emphasis in

original); Chase, 110 F.3d at 427 (same). In considering

this question, however, we do not limit ourselves to American General’s supplemental brief, but instead address

the arguments that both parties have made in support

of federal jurisdiction.

In its effort to salvage federal jurisdiction, American

General makes every observation but the inevitable—that

without punitive damages, Smith’s complaint seeks

well below the minimum amount in controversy requirement of more than $75,000. Among its arguments are
8 No. 02-2114

several that we find particularly specious, including that

Smith has herself admitted to seeking in excess of

$75,000, the district court agreed that the complaint

states a claim for in excess of $75,000, and there was

no improper manipulation of the federal court’s jurisdiction because Smith sought punitive damages in state

court and it was American General that removed the case

to federal court. These are all proper observations; however, they all amount in the end to statements that the

parties have agreed on jurisdiction or that no one examined the question before—arguments that are not

sufficient to support federal jurisdiction.

As we have already noted, Smith, American General,

and the district judge may all agree that the complaint

seeks in excess of $75,000, but this court still has an

independent obligation to make sure that they are correct. Ross, 693 F.2d at 660. Furthermore, the record

below does not indicate that the district court considered

the amount-in-controversy question posed to the parties

by this court, or whether it addressed the question whether punitive damages in such a large amount were unattainable to a legal certainty. Even if these questions

had been considered by the district judge, it would be

entirely proper for this court to consider the question on

appeal. Id.

And while federal courts are suspicious of claims filed

in federal court that attempt to circumvent the amount

in controversy requirements for diversity jurisdiction

by seeking excessive and unrealistic punitive damages,

see e.g., Anthony v. Security Pacific Fin. Servs., Inc., 75

F.3d 311, 315 (7th Cir. 1996), this does not prove the

converse. We know of no case that says that when a complaint is filed in state court seeking unrealistic punitive

damages, it may properly be removed to state court because the plaintiff did not intend an end-run around

the jurisdictional requirements of § 1332(a). In making
No. 02-2114 9

this argument, American General misconstrues the holding of DelVecchio and would have us read that case as

applying only in situations where there was some intentional manipulation of punitive damages by a plaintiff

eager to file her complaint in federal court. But we read

DelVecchio as saying much more: when a federal court

is convinced to a legal certainty that punitive damages

that form a necessary component of the amount-in-controversy requirement cannot be obtained, the court

must dismiss the case for want of jurisdiction. 230 F.3d

at 980. The Supreme Court’s recent decision in State

Farm Mutual Automobile Insurance Co. v. Campbell,

___U.S. ___, 123 S.Ct. 1513, 1526 (2003), reinforces our

view that we must take a realistic look at the size of the

punitive damages demanded.

Turning to the damages sought in Smith’s complaint,

American General reasons that as the removing party,

it was entitled to read the complaint as easily stating

the requisite $75,000+ in damages based on the relief

Smith sought. In making this argument, American General

calls our attention to the following aspects of Smith’s

complaint: first, she sought compensatory damages as

part of her consumer and statutory fraud claims “in the

amount of the excess premium she paid; in the reduced

benefit originally paid by American General; and by

being forced to retain attorneys to collect the benefit to

which she was entitled”; second, Smith filed her complaint in the Law Division of the Circuit Court of Cook

County, Illinois, which “strongly indicated that she was

seeking compensatory damages of at least $30,000”; third,

Smith sought $25,000 as a statutory penalty under her

vexatious delay claim; and finally, Smith sought in excess

of $1,000,000 in punitive damages. Although American

General points out that the complaint is silent on the

amount of excess premiums that Smith paid and her prelitigation attorney’s fees, it acknowledges that the reduced benefit was in the amount of $7,500.
10 No. 02-2114

There are several problems with American General’s

argument, starting with its claim that Smith sought no

less than $30,000 in damages because otherwise she

would not have filed in the circuit court’s law division,

which sets a $30,000 floor on damages. We fail to see how

this supports American General’s position that the significantly higher amount in controversy required for

federal court was properly alleged. The same problem

(i.e., possible failure to meet the required jurisdictional

amount) appears to have existed in the circuit court, and

we can assume that if the case had stayed in state court,

the circuit court would probably have made its own inquiry into its jurisdiction. The other, obvious problem,

is that the circuit court’s $30,000 floor on damages is

well below the $75,000 floor set by § 1332(a).

The more fundamental problem with American General’s position is that it essentially pleads ignorance with

regard to the refund for overpaid premiums that Smith

sought since her complaint failed to specify an actual

amount. We confronted an identical argument in Ross,

and there this court refused to allow a removing insurance company to argue that it thought the jurisdictional

amount was met where it had actual knowledge that

the amount at issue fell well below the statutory minimum. 693 F.2d at 662. While it is true that Smith’s complaint failed to specify the amount of overpayment she

sought, that figure was within American General’s knowledge. American General’s agents issued receipts for Smith’s

monthly payments (and by this time Smith’s lawyer

had supplied American General with copies of all of those

receipts) and the company knew the original monthly

premium that her first policy carried. With this information in hand, the simple arithmetic that American General needed to do in order to calculate how much Smith

sought to recover would not stump an elementary school

student, and comes nowhere near $75,000.
No. 02-2114 11

We turn now to the remaining damages that Smith’s

complaint sought: a $25,000 statutory penalty for vexatious delay in payment of an insurance benefit under

Section 155 of the Illinois Insurance Code, which allows a

party that experienced “unreasonable delay in settling

a claim” to recover attorneys fees and punitive damages

of no more than $25,000 if the court also finds that the

delay was “vexatious and unreasonable,” 215 ILL. COMP.

STAT. 5/515 (2000), and over $1,000,000 in punitive damages. As a general rule, at the jurisdictional stage, courts

do not conduct an inquiry into the merits beyond verifying that the claim is not brought “solely for the purpose

of obtaining jurisdiction or where such a claim is wholly

insubstantial or frivolous.” Bell v. Hood, 327 U.S. 678, 682-

83 (1946); see also Turner/Ozanne v. Hyman/Power, 111

F.3d 1312, 1317 (7th Cir. 1997) (quoting Bell, 327 U.S.

at 682-83). Here, the statutory claim for $25,000 for vexatious delay in payment of an insurance policy was not

raised “solely for the purpose of obtaining jurisdiction,” but

it is hard to see how the claim is not frivolous. As the

district court found, American General did not delay at

all in paying Smith her insurance benefits once it had all

of the information that it needed to verify that she continued to make payments under her first policy and that

the application that it had for a new policy was filed with

a forged signature. Four days after the company had all

of the information that it needed to reach this conclusion,

American General paid Smith the balance of her benefits

plus interest. Thus the delay in payment occurred because Smith (through her lawyers) waited nearly one

year between her first contact with American General

and her second effort to secure payment. All but four days

of the time lapse was thus attributable to Smith, and could

in no way be termed either vexatious or otherwise blameworthy on American General’s part. See e.g., Citizens First

Nat’l Bank of Princeton v. Cincinnati Ins. Co., 200 F.3d

1102, 1110 (7th Cir. 2000) (citing Green v. Int’l Ins. Co., 605
12 No. 02-2114

N.E.2d 1125, 1129 (Ill. App. Ct. 1992) (no vexatious delay where delay in payment results from “bona fide dispute

about coverage”)). So, like the district court, we fail to see

how Smith could prevail on what looks like a frivolous

claim for $25,000 under 215 ILL. COMP. STAT. 5/155 (2000).

We add that even if, giving her every benefit of the doubt,

this claim could be considered for purposes of the jurisdictional amount, it would still take her only up to

$27,536.54, and she would need to make a non-frivolous

allegation that she was entitled to at least $47,463.47 in

general punitive damages to establish that more than

$75,000 was in controversy.

Since, however, we see no way that Smith would be

entitled to $25,000 for vexatious delay in payment of her

claim, she must show that she could recover a minimum

of $72,463.47 in punitive damages in order to exceed the

$75,000 floor. This brings us back to the problem that

we tackled in DelVecchio. American General tries to

distinguish DelVecchio by noting that according to the

company’s calculations, the ratio of punitive to compensatory damages in this case is “at the very least, 2.31 to 1

and, therefore, not beyond legal certainty” that Smith

could recover in excess of the jurisdictional minimum.

Aside from the fact that we have ruled out an award of

up to $25,000 for vexatious delay under the Insurance

Code, which in essence reduces the ratio of punitive to

compensatory damages in this case to 29 to 1, American

General is wide of the mark in advancing this argument.

In DelVecchio, we were unwilling to find federal jurisdiction in a case where the amount in controversy consisted

of punitive and compensatory damages at a ratio of 121 to 1

because such an award is at the outer limits of what

the Indiana courts permit in terms of damages awards. 230

F.3d at 980.

This is not to say that in all cases where punitive damages form a significant part of the jurisdictional amount
No. 02-2114 13

in controversy a federal court must assure itself that such

damages are proportional to compensatory damages. The

point of DelVecchio was that the likelihood of an Indiana

court awarding such damages was so slim that we

were satisfied that the jurisdictional amount could not

be met in that case. Id. In reaching that conclusion we

did not intimate that courts must train their sight on

ratios or numbers where punitive damages play a part

of the jurisdictional minimum; the fundamental inquiry,

after all, is whether it appears beyond a legal certainty

that the punitive damages will not be awarded under the

law that governs the case. See Anthony, 75 F.3d at 315;

Cadek v. Great Lakes Dragaway, Inc., 58 F.3d 1209, 1211-

12 (7th Cir. 1995). Where the ratio of punitive to compensatory damages is as imbalanced as it was in

DelVecchio, a court must look closely to see whether federal

jurisdiction exists. Anthony, 75 F.3d at 315. But it is

possible to find jurisdiction lacking for other reasons, and,

as in our case, if it appears to a legal certainty that

the claim for the requisite level of punitive damages

cannot be sustained, then regardless of how much the

plaintiff seeks in punitive damages relative to compensatory damages, she cannot count the punitive damages

towards the jurisdictional minimum. Bell, 327 U.S. at 682-

83. Even evaluating this claim at the time American

General removed the case to federal court—a time when

the state fraud claims were still a part of the case—we

find no basis in Illinois law to support such a large award

of punitive damages.

Neither party has focused on the possibility that Smith’s

initial fraud claims against American General might

have convinced an Illinois court to award her approximately $72,500 in punitive damages for the problems

she experienced before she made her first demand for

payment. Instead, in Smith’s supplemental brief addressing jurisdiction, she has suggested that we should include
14 No. 02-2114

the attorney’s fees that she would receive for her statutory

and common law fraud claims, as well as for her vexatious

delay claim under the Illinois Insurance Code. We have

already explained why her efforts to recover attorney’s

fees and punitive damages for vexatious delay fail; therefore we need only consider Smith’s argument that the

running tally of damages in this case includes at least

$25,000 in attorney’s fees for her statutory and common

law fraud counts. Smith readily confesses that this $25,000

figure is merely an approximation of her actual attorney’s

fees to pursue these claims because the parties did not

undertake discovery on this question and the current record is silent on how much this case has cost Smith’s lawyer

to pursue. But this is a problem that we could easily cure

by remanding the case for limited discovery on the question of attorney’s fees. We would pursue such a route were

there not a more fundamental problem with relying on

attorney’s fees to meet the amount in controversy requirement. This case is controlled by Gardynski-Leschuck v.

Ford Motor Co., which held that post-filing attorney’s fees

cannot count toward the amount in controversy requirement because federal jurisdiction exists, if at all, at the

time of filing. 142 F.3d 955, 958 (7th Cir. 1998). See also

Hart, 253 F.3d at 273 (“The amount in controversy is

whatever is required to satisfy the plaintiff’s demand, in

full, on the date suit begins.”) (emphasis in original). This

rule is not only controlling in this case, but it makes

good sense. As sympathetic as we are to Carolyn Smith’s

situation, we see no reason to allow a plaintiff bringing

state law claims into federal court on the basis of actual

damages that total a mere $2,534.56 simply because

she has run up a large bill with her lawyer to recover that

sum. To do so would be to defy Congress’s intent to limit federal diversity jurisdiction to cases in which the

amount in controversy exceeds $75,000.
No. 02-2114 15

III

Carolyn Smith urges that we find federal jurisdiction

properly lies in her case in part because a remand to state

court will impose significant new costs that may in the

end make pursuit of her claims impossible. While we are

not unsympathetic to her situation, and we cannot understand why American General has not at the very least

voluntarily refunded Smith’s excess premiums of $36.54,

we are simply not in a position to create federal jurisdiction where it is otherwise lacking. American General has

not shown that more than $75,000 was in controversy

in this case at the time of removal, and thus we VACATE the

district court’s order and REMAND the case with instructions that the district court remand Smith’s case to state

court.

A true Copy:

Teste: 

 ________________________________

Clerk of the United States Court of

Appeals for the Seventh Circuit 

USCA-02-C-0072—7-24-03