Court Opinion

ID: 2766016
Source: CourtListenerOpinion
Date Created: 2014-12-31 22:00:48.921602+00
Date Added: 2024-06-11T12:08:12.410926
License: Public Domain

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-­‐‑
2                                                                                No.  14-­‐‑1464  

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.  
No.  14-­‐‑1464                                                                    3  

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),  
4                                                                  No.  14-­‐‑1464  

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].”  
No.  14-­‐‑1464                                                                 5  

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?  
6                                                                      No.  14-­‐‑1464  

      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.  
No.  14-­‐‑1464                                                                   7  

      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.