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Arnold v. State Farm Fire and Casualty Co.

United States District Court, S.D. Alabama, Northern Division

August 3, 2017

ANNIE ARNOLD, etc., Plaintiff,



         This matter is before the Court on the defendant's motion to dismiss. (Doc. 10). The parties have filed briefs and evidentiary materials in support of their respective positions, (Docs. 10, 11, 14, 15, 27, 30), [1] and the motion is ripe for resolution.[2]


         This action was filed in state court and timely removed by the defendant.[3]According to the class action complaint, (Doc. 1-2 at 1-14), the plaintiff's house was insured by the defendant under a policy (“the Policy”) providing replacement cost value (“RCV”) coverage. Payment on covered losses under such policies proceeds in two stages. Initially, the defendant pays actual cash value (“ACV”), which it calculates as the estimated cost of materials and labor required to complete the removal of damaged materials and subsequent repairs, less depreciation. The defendant pays the difference between ACV and RCV only if the insured accomplishes the repairs, rebuilding or replacement of the damaged property within a specific time frame and submits proof of same to the defendant. The insured therefore must front repair/replacement costs exceeding the ACV payment. In the plaintiff's case, and as a rule, in calculating ACV the defendant depreciates both materials and labor. The single claim presented is that the defendant breached its contractual duty to pay ACV by unlawfully depreciating labor costs.


         The defendant argues that the plaintiff lacks standing to pursue her claim and that the Court thus lacks subject matter jurisdiction. The defendant further argues that the complaint fails to state a claim upon which relief can be granted.

         I. Standing.

         “In every federal case, the party bringing the suit must establish standing to prosecute the action.” Elk Grove Unified School District v. Newdow, 542 U.S. 1, 11 (2004), abrogated in part on other grounds, Lexmark International, Inc. v. Static Control Components, Inc., 134 S.Ct. 1377 (2014). Standing has both constitutional and prudential components, id., but the defendant challenges only constitutional standing. (Doc. 11 at 12). Constitutional standing is jurisdictional, and in its absence “the federal court must dismiss the case for lack of subject matter jurisdiction.” Florida Wildlife Federation, Inc. v. South Florida Water Management District, 647 F.3d 1296, 1302 (11th Cir. 2011); accord Stalley ex rel. United States v. Orlando Regional Healthcare System, Inc., 524 F.3d 1229, 1232 (11th Cir. 2008).

         A challenge to standing under Rule 12(b)(1) can be either facial or factual. The defendant mounts a factual challenge. In such a case, “matters outside the pleadings, such as testimony and affidavits are considered.” McElmurray v. Consolidated Government, 501 F.3d 1244, 1251 (11th Cir. 2007) (internal quotes omitted). “Since such a motion implicates the fundamental question of a trial court's jurisdiction, a trial court is free to weigh the evidence and satisfy itself as to the existence of its power to hear the case without presuming the truthfulness of the plaintiff's allegations.” Makro Capital of America, Inc. v. UBS AG, 543 F.3d 1254, 1258 (11th Cir. 2008) (internal quotes omitted).

         The “irreducible constitutional minimum of standing contains three elements.” Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992). “First, the plaintiff must have suffered an injury in fact - an invasion of a legally protected interest which is (a) concrete and particularized … and (b) actual or imminent, not conjectural or hypothetical ….” Id. (internal quotes omitted). “Second, there must be a causal connection between the injury and the conduct complained of - the injury has to be fairly traceable to the challenged action of the defendant, and not the result of the independent action of some third party not before the court.” Id. (internal quotes omitted). “Third, it must be likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision.” Id. at 561 (internal quotes omitted).

         The defendant has presented uncontroverted evidence that, before this lawsuit was filed, it had paid the plaintiff RCV based on her undepreciated labor costs. (Doc. 11-1). The defendant concludes that, because no disputed labor depreciation remained unpaid at the commencement of the action, the plaintiff is unable to satisfy the second requirement of constitutional standing. (Doc. 11 at 14, 15 n.8). This seems doubtful, since the defendant does not dispute that it, rather than some third party acting independently, performed the challenged action of reducing ACV by depreciating labor costs. The cases cited by the defendant, however, do suggest (with minimal analysis) that a defendant's payment in full of a plaintiff's claim may negate an injury in fact, make it impossible to redress the (already redressed) injury by a favorable decision, or moot the controversy.[4]

         The plaintiff responds that she has not in fact been made whole. She notes that the defendant did not pay RCV until several years after paying ACV, and her complaint demands an award of prejudgment interest to compensate her for the withholding of labor depreciation during this interval. (Doc. 1-2 at 13; Doc. 15 at 23).

         Anticipating this response, the defendant argues that entitlement to prejudgment interest for breach of contract is governed by Alabama Code § 8-8-8 and that the plaintiff, for various fact-intensive reasons, cannot satisfy that provision's elements, viz., that the amount due was certain, that the time it was due was certain, and that the defendant knew both. (Doc. 11 at 15-16). The defendant assumes rather than demonstrates that its argument goes to standing, but the Court cannot indulge the defendant's assumption.

         The defendant does not identify which element or elements of standing it believes to be imperiled by its argument, but it makes no difference. As for the first element, the only possible question is whether the plaintiff suffered the “invasion of a legally protected interest.” Lujan, 504 U.S. at 560. “A legally cognizable injury requires infringement of an interest protected by statute or otherwise.” Primera Iglesia Bautista Hispana, Inc. v. Broward County, 450 F.3d 1295, 1304 (11th Cir. 2006) (internal quotes omitted). The complaint alleges the breach of a contract to pay undepreciated labor costs, and contractual rights are certainly protected by law. E.g., Avenue CLO Fund Ltd. v. Bank of America, 709 F.3d 1072, 1077 (11th Cir. 2013). Although the defendant has recently paid those undepreciated labor costs, it has not paid interest on the withheld amounts. Even if general contract law does not provide a legally protected interest in receiving interest on wrongly withheld sums, Section 8-8-8 establishes such an interest by providing that “[a]ll contracts … for the payment of money … bear interest from the day such money … should have been paid ….” As for the second element of standing, there is no question but that it was the defendant, and not some missing third party, that has failed to pay the plaintiff interest on the amounts withheld as depreciation on labor.

         As for the third element, redressability means a “substantial likelihood that the requested relief will remedy the injury in fact.” Vermont Agency of Natural Resources v. United States ex rel. Stevens, 529 U.S. 765, 771 (2000) (internal quotes omitted); accord Already, LLC v. Nike, Inc., 568 U.S. 85, 90 (2013) (the plaintiff's injury must be “likely to be redressed by the requested relief”) (internal quotes omitted); Steel Co. v. Citizens for a Better Environment, 523 U.S. 83, 103 (1998) (redressability is “a likelihood that the requested relief will redress the alleged injury”). “Relief that does not remedy the injury suffered cannot bootstrap a plaintiff into federal court; that is the very essence of the redressability requirement.” Steel Co., 523 U.S. at 107. The plaintiff's injury must be “likely to be redressed if the requested relief is granted.” Gladstone Realtors v. Village of Bellwood, 441 U.S. 91, 100 (1979). Plainly, an award of prejudgment interest will remedy the injury suffered by the defendant's failure to pay such interest, precisely redressing the injury.

         The defendant challenges standing by arguing that, under the evidence it presents, the plaintiff cannot satisfy the three-part test identified by the Alabama Supreme Court for recovery under Section 8-8-8. Primarily, the defendant argues that, under the Policy, payment was not due until 60 days after the plaintiff presented proof of loss; that the plaintiff never did so; and that the defendant's payment of ACV did not waive the proof-of-loss trigger (as would usually occur) because the Policy contains a no-waiver provision and because it did not realize its payment would work a waiver. Because the date the payment was due never arrived, the defendant concludes the plaintiff cannot be entitled to receive an award of prejudgment interest. The defendant also presents factual arguments denying that the amount due was certain or that it knew either the amount due or the date it was due. (Doc. 11 at 15-16; Doc. 27 at 9-12).

         The Court need not pass on the factual or legal validity of these arguments, because they do not address standing but rather the merits of the plaintiff's case. “Standing is a threshold jurisdictional question which must be addressed prior to and independent of the merits of a party's claims.” Interface Kanner, LLC v. JPMorgan Chase Bank, 704 F.3d 927, 932 (11th Cir. 2013) (internal quotes omitted). It thus does not matter for standing purposes whether the plaintiff can actually prove the defendant is legally obligated to pay prejudgment interest. See, e.g., Warth v. Seldin, 422 U.S. 490, 500 (1975) (“[S]tanding in no way depends on the merits of the plaintiff's contention that particular conduct is illegal ….”); Mulhall v. UNITE HERE, Local 355, 618 F.3d 1279, 1286 (11th Cir. 2010) (same).

         The defendant, which relies exclusively on Lujan for its understanding of standing's elements, appears to have misconstrued the Supreme Court's statement that redressability requires that the injury “will be redressed by a favorable decision.” 504 U.S. at 561. The defendant appears to take this language to mean that, assuming a favorable decision on liability, it must be likely the plaintiff can establish entitlement to the requested relief. A “favorable decision, ” however, is a favorable decision “on the merits, ” which includes an award of the requested relief. E.g., Parker v. Scrap Metal Processors, Inc., 386 F.3d 993, 1004 (11th Cir. 2004). As the cases cited above and in the accompanying note reflect, the test for standing is whether, assuming the plaintiff receives the relief she requests, that relief will redress the injury she suffered.[5] Undoubtedly an award of prejudgment interest will redress a failure to pay prejudgment interest.

         In its reply brief, the defendant raises a new standing argument: that, under Alabama law, the pre-suit payment and acceptance of principal “extinguish[es]” any interest claim. (Doc. 27 at 9). District courts, including this one, ordinarily do not consider arguments raised for the first time on reply.[6] However, because - and only because - the defendant raises the argument as a challenge to subject matter jurisdiction, the Court addresses it. E.g., Bank of Brewton v. Travelers Companies, Inc., 2014 WL 2113092 at *4 (S.D. Ala. 2014) (“[W]hen the issue goes to subject matter jurisdiction, the Court will consider an argument first raised in reply.”).

         As with the defendant's previous arguments, this one goes not to standing but to the merits of the plaintiff's claim, viz., her ability to establish the elements for recovery of prejudgment interest. But even were the defendant's argument truly one implicating standing, it would fail. The defendant relies for its argument on a 1914 decision of an intermediate Alabama court which ruled that, when interest is a function of statute and not of express contractual provision, interest is not the basis of a separate right of action but only an incident to recovery of the principal, such that payment and acceptance of the principal extinguishes any right to interest. Louisville & Nashville Railroad Co. v. Elmore & Brame, 65 So. 695, 695-96 (Ala.App. 1914). The Alabama Supreme Court, however, has repudiated the proposition on which the defendant relies:

         Florida Family Policy Council v. Freeman, 561 F.3d 1246, 1258 (11th Cir. 2009) (standing absent where the requested relief - barring enforcement of certain canons of judicial conduct - would not redress the injury of judicial disqualification because an unchallenged statute would still result in disqualification); KH Outdoor, L.L.C. v. Clay County, 482 F.3d 1299, 1303, 1305 (11th Cir. 2007) (standing absent where the requested relief - striking down a sign ordinance - would not redress the injury of inability to erect proposed signs, because the plaintiff's permit applications failed to meet other, unchallenged statutes and regulations).

We have carefully considered these cases [including Elmore & Brame] and disagree with the reasoning that allows the collection of interest after the acceptance of principal when the right to interest is expressed in the contract, but not when the right to interest is mandated by statute. We have searched in vain and find no basis for the distinction, especially in the light of our cases which would read the statute [Section 8-8-8] into the contract, making it part of the agreement.

Thomas v. Liberty National Life Insurance Co., 368 So.2d 254, 258 (Ala. 1979). Alabama, in short, permits a stand-alone action for contractual interest under Section 8-8-8.[7]

         The plaintiff's motion to remand argues that, if she lacks constitutional standing and the Court thus lacks subject matter jurisdiction, the proper remedy is remand rather than dismissal. (Doc. 19 at 2). Because the plaintiff does have standing, her motion to remand is due to be denied.

         II. Failure to State a Claim.

         As noted, the dispute in this case centers on whether the defendant properly depreciated labor in its calculation of ACV. The defendant asserts that this question must as a matter of law be answered in the affirmative.

         The Policy provides that, “until actual repair or replacement is completed, we will pay only the actual cash value at the time of the loss of the damaged part of the property, ” capped by the lower of policy limits or cost to repair or replace. (Doc. 1-2 at 28).[8] The Policy does not define “actual cash value.” “The court must enforce the insurance policy as written if the terms are unambiguous ….” Safeway Insurance Co. v. Herrera, 912 So.2d 1140, 1143 (Ala. 2005). “Whether a provision of an insurance policy is ambiguous is a question of law.” Id. “If a word or phrase is not defined in the policy, then the court should construe the word or phrase according to the meaning a person of ordinary intelligence would reasonably give it.” Id. That is, “[w]hen analyzing an insurance policy, a court gives words used in the policy their common, everyday meaning and interprets them as a reasonable person in the insured's position would have ...

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