Opinion
No. 1:01CV876
March 31, 2003
MEMORANDUM OPINION
This matter is now before the court on Plaintiff Studio Frames' Motion to Enlarge Time to Amend Complaint and Motion to Amend [Doc. # 21] and Studio Frames' Motion to Extend Discovery Period [Doc. # 31]. For the reasons set forth below, Studio Frames' Motion to Amend the Complaint is DENIED, and Studio Frames' Motion to Extend Discovery is DENIED as MOOT.
I.
Plaintiff Studio Frames is an art gallery that leases space at the Eastgate Shopping Center in Chapel Hill, North Carolina. In November 1996, Studio Frames purchased a Standard Flood Insurance Policy from Defendant Standard Fire Insurance Company in the amount of $194,700 in Building Coverage to cover leasehold improvements and $283,200 in Contents Coverage to cover the contents of the gallery. On July 23 and 24, 2000, Studio Frames suffered a flood loss. After Studio Frames contacted Standard Fire to report the loss, an adjuster arrived on behalf of Standard Fire to adjust the loss. The adjuster informed Studio Frames that it was not eligible to receive any money for damage suffered to the leasehold improvements under the Building Coverage portion of the flood insurance policy because Studio Frames was a lessee and did not own the gallery space. The adjuster explained that Studio Frames could make a claim for the leasehold improvements under the Contents Coverage portion of the policy in an amount equal to 10% of the contents coverage. On September 20, 2000 Studio Frames submitted a proof of loss to Standard Fire seeking $287,200, the policy limits under the contents provision in the policy. To date, Standard Fire has paid $143,336.27 under the contents coverage of the flood insurance policy.
On September 14, 2001, Studio Frames filed this suit alleging breach of contract and claiming $132,597.05 in leasehold improvements coverage and $172,083.73 in additional contents coverage. An amended complaint was filed on November 23, 2001. On April 23, 2002, the parties entered into a Joint Rule 26(f) Report and Order that provided, "[t]he parties shall be allowed until August 15, 2002 to request leave to amend pleadings or join additional parties." [Doc. # 11. ¶ 17] This order also provided that discovery would close on October 15, 2002. On October 21, 2002, the parties filed a joint motion to extend the discovery period an additional 60 days. This motion was granted by Magistrate Judge Eliason, and the discovery period was extended until December 15, 2002. [Doc. # 15]. On December 9, 2002, Studio Frames moved for additional time to amend its complaint in order to add a claim for unfair and deceptive trade practices. [Doc. # 21]. On January 13, 2003, Studio Frames moved to extend the discovery period. [Doc. #31].
II.
Generally, motions to amend a pleading are governed by Rule 15(a) of the Federal Rules of Civil Procedure. Rule 15(a) states that ". . . leave shall be freely given when justice so requires." However, when a scheduling order has been entered, Rule 16(b), governing modification to a scheduling order, is implicated. Under Rule 16(b), "[a] schedule shall not be modified except upon a showing of good cause and by leave of the district judge. . . ." While the Fourth Circuit has not specifically ruled on the interaction between Rule 16(b) and Rule 15(a), the Fourth Circuit has explained, that a defendant seeking to amend his answer to add a compulsory counterclaim after the time for amendments in the scheduling order has passed, must satisfy "both the Rule 16(b) analysis and the Rule 13(f) (the general rule governing counterclaims] analysis."Essential Housing Management, Inc. v. Walker, 1998 WL 559349, **4 (4th Cir. June 9, 1998) (unpublished opinion); see also Forstmann v. Culp, 114 F.R.D. 83, 85 (M.D.N.C. 1987) (A party who requests leave to amend after the date specified in the initial scheduling order must satisfy two prerequisites. The party must first demonstrate that there is good cause" why the court should not adhere to the dates specified in the scheduling order. If the party shows "good cause" to the court's satisfaction, the party must then demonstrate that leave to amend is proper under Federal Rule of Civil Procedure 15."). In deciding whether Studio Frames should be given leave to amend its complaint, it is necessary to consider first whether Studio Frames satisfies the "good cause" standard of Rule 16(b) before deciding whether Studio Frames satisfies the more liberal standard of Rule 15(a).
A.
When the district court issues a scheduling order that sets a deadline for amendments to pleadings, a party wishing to amend its pleading must comply with that deadline or show good cause for failing to do so. The Fourth Circuit has found that "good cause" exists when the evidence needed by a plaintiff to prove an amended claim "did not surface until after the amendment deadline." Lone Star Industries, Inc. v. Lafarge, 1994 WL 118475 (4th Cir. April 7, 1994) (unpublished opinion); see also Forstmann, 114 F.R.D. at 86 n. 1 (M.D.N.C. 1987) ("`Good cause' for modifying the scheduling order might exist if . . . plaintiff uncovered previously unknown facts during discovery that would support an additional cause of action").
In this case, Studio Frames asserts that it has satisfied the good cause standard because it was unaware of a potential unfair and deceptive trade practice claim until the depositions of Standard Fire's 30(b)(6) designees. These depositions occurred on September 11, 2002. Studio Frames contends that until these depositions, it was unaware that Standard Fire had known prior to issuing the flood insurance policy that FEMA had interpreted the policy not to allow tenants to obtain building coverage. Studio Frames further asserts that to issue the flood insurance policy to a tenant with the knowledge that it was not eligible for building coverage, constitutes an unfair and deceptive trade practice. Studio Frames argues that FEMA's interpretation of the insurance policy, and Standard Fire's knowledge of that interpretation, was not known to Studio Frames until after the scheduling order deadline for amendments to pleadings had passed.
The argument that Studio Frames was unaware of FEMA's interpretation or Standard Fire's knowledge of that interpretation until September 11, 2002, however, is difficult to accept. The adjustor initially gave this information to Studio Frames prior to suit having been filed. If not in those exact words, the idea was communicated in such a way that both FEMA's and Standard Fire's understanding should have been discovered in the exercise of reasonable diligence during the initial discovery period and within the time set under Rule 16(b) for amending the complaint.
B.
Assuming, however, that good cause could be shown under Rule 16(b), the motion would still be denied under Rule 15(a). Rule 15(a) of the Federal Rules of Civil Procedure provides that having once amended a pleading as a matter of right, "a party may amend the party's pleadings only by leave of court or by written consent of the adverse party; and leave shall be given freely when justice so requires." Fed.R.Civ.P. 15(a). The general standard for determining "when justice so requires" is:
In the absence of any apparent or declared reason — such as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, futility of amendment, etc. — the leave sought should, as the rules require, be "freely given."Foman v. Davis, 371 U.S. 178, 182 (1962). As the Fourth Circuit has explained the Foman factors, prejudice, bad faith, and futility are "the only legitimate concerns in denying leave to amend, since only these truly relate to protection of the judicial system or other litigants."Davis v. Piper Aircraft Corp., 615 F.2d 606, 613 (4th Cir. 1980).
Standard Fire asserts that Studio Frames should not be allowed to amend its complaint at this stage in the litigation because to do so would be a waste of judicial resources. Standard Fire does not assert, however, that it would be prejudiced by an amendment and does not assert that the motion to amend has been made in bad faith. Therefore, the Court will consider only whether the motion to amend would be futile.
A proposed amendment would be futile if the claim would not survive a motion to dismiss. See Burns v. AAF-McQuay, Inc., 166 F.3d 292, 294-95 (4th Cir. 1999) (holding that amendment would be futile where a proposed addition would not state a claim). Therefore, in evaluating Studio Frames' motion to amend the complaint to add a claim of unfair and deceptive trade practice, it is necessary to decide whether the claim would survive a motion to dismiss pursuant to Rule 12(b)(6). Standard Fire asserts that Studio Frames' claim of unfair and deceptive trade practices is preempted by federal law. If an unfair and deceptive trade practices claim under state law is preempted by federal law, then amendment would be futile and leave to amend will be denied.
C.
Federal preemption of state law exists when: (1) Congress expressly states that a certain enactment preempts state law ("express preemption"); (2) Congress regulates conduct in a field intended to be occupied exclusively by the Federal Government ("field preemption"); or (3) state law actually conflicts with federal law ("conflict preemption"). English v. General Elec. Co., 496 U.S. 72, 78-79 (1990). Conflict preemption occurs when compliance with both state and federal requirements is impossible, or "where state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress." English, 496 U.S. at 79. Essentially, whether federal law preempts state law is a question of Congressional intent.N.W. Cent. Pipeline Corp. v. State Corp. Comm'n of Kan., 489 U.S. 493, 509 (1989). Thus, in order to determine whether a state law claim for unfair and deceptive trade practices is preempted, it is necessary to determine Congressional intent with respect to the National Flood Insurance Program.
The majority of courts that have addressed the issue of extra-contractual claim preemption and flood insurance have decided that express preemption and field preemption are not applicable. See Peal v. North Carolina Farm Bureau Mutual Ins. Co., 212 F. Supp.2d 508 (E.D.N.C. 2002) (citing cases and analyzing express preemption and field preemption). The present analysis considers only conflict preemption.
In 1968, Congress enacted the National Flood insurance Act ("NFIA").See 42 U.S.C. § 4001-4129. The NFIA established the National Flood Insurance Program ("NFIP"), which provides reasonably priced flood insurance to individuals who live in flood-prone areas. Between 1968 and 1978, the NFIP was insured and administered by the National Flood Insurers Association pursuant to an agreement with the Department of Housing and Urban Development (HUD). 42 U.S.C. § 4051-53. Under this agreement, HUD served as the underwriter for the program, determined which risks would be insured, and decided what premiums would be paid for those risks. The National Flood Insurers Association, a voluntary, unincorporated group of insurance companies, actually issued and serviced the flood insurance policies, and processed claims for losses pursuant to those policies. The agreement between the National Flood Insurance Association and HUD expired on December 31, 1977, and effective January 1, 1978, HUD assumed complete administration of the NFIP including all issuing, servicing, and claims operations.
By an executive order issued April 1, 1979, operation of the NFIP was transferred to The Federal Emergency Management Agency ("FEMA"). Executive Order 121-27. Congress subsequently authorized the director of FEMA "to undertake any necessary arrangements to carry out the program of flood insurance." 42 U.S.C. § 4071 (a); see also 44 C.F.R. § 61.13 (f), 62.23. Pursuant to this authority, FEMA created the Write-Your-Own insurance program (WYO), which authorizes private insurance companies to issue flood insurance policies on behalf of FEMA.
Standard Fire participates in the WYO program.
All flood insurance policies issued under the NFIA are called Standard Flood Insurance Policies ("SFIP"), and an SFIP may be purchased directly from FEMA see 44 C.F.R. § 62.3 (c), or through a WYO carrier. See 44 C.F.R. § 61.13 (f). Regardless of whether an SFIP is issued by FEMA or a WYO carrier, the following requirements must be satisfied in order to obtain a flood insurance policy: (1) an applicant must submit a complete flood insurance application, which is a standardized form created by FEMA; (2) the subject property must be located in a participating community; and (3) the applicant must obtain and file an elevation certificate prepared by a licensed surveyor, engineer, or architect. Once these three requirements are satisfied and the premiums are paid, the WYO insurer is directed to issue the policy within 15 days. 44 C.F.R. Pt. 62, App. A, Art. II (B)(1).
Pursuant to federal regulations promulgated by FEMA, the application forms "utilized by the National Flood Insurance Program shall be the only application forms used in connection with the Standard Flood Insurance Policy." 44 C.F.R. § 61.13 (c) (emphasis added).
The relationship between FEMA and the WYO carriers is set out in 44 C.F.R. Pt. 62. While WYO companies actually issue flood insurance policies in their own names, WYO companies may not alter, vary, or waive any of the terms of the application or the policies. 44 C.F.R. § 62.23 (c). Furthermore, pursuant to the agreement between FEMA and the WYO insurers, the WYO companies do not profit from the collection of premiums; rather, under the regulations governing the WYO program, a WYO company keeps only the amount necessary to cover its operating expenses. The remaining money obtained through the collection of premiums is remitted to the Federal Insurance Administration for deposit in the National Flood Insurance Fund. See 44 C.F.R. pt. 62, App. A, Art. VII(B). WYO companies only profit from their participation in the program if claims are paid. 44 C.F.R. Pt. 62, App. A, Art. III(C)(1) (providing that WYO companies receive a 3.3 percent commission on any claims they pay).
In addition to prescribing the requirements for procurement of flood insurance policies, Congress and FEMA have also heavily regulated the process for handling claims under the flood insurance program and have provided for judicial review of claims handling. See 42 U.S.C. § 4072. Congress authorized FEMA to "prescribe regulations establishing the general method or methods by which proved and approved claims for losses may be adjusted and paid for any damage or loss of property which is covered by flood insurance." 42 U.S.C. § 4019. Pursuant to this authorization, FEMA has specified that a "WYO Company issuing flood insurance coverage shall arrange for the adjustment, settlement, payment and defense of all claims arising from policies of flood insurance it issues under the Program, based upon the terms and conditions of the Standard Flood Insurance Policy." 44 C.F.R. § 62.23 (d). The regulations also provide that FEMA will reimburse the WYO insurer for costs associated with defending suits if a WYO is sued regarding the handling of a flood insurance claim. 44 C.F.R. Pt. 62, App. A, Art. III (C). There is an important limitation on this reimbursement, however, in that FEMA will not reimburse the WYO if FEMA determines that the WYO insurer has acted outside the scope of the agreement between FEMA and the WYO. 44 C.F.R. Pt. 62, App. A, Art. III (D)(4).
42 U.S.C. § 4072 provides:
Adjustment and payment of claims; judicial review; limitations; jurisdiction
In the event the program is carried out as provided in section 4071 of this title, the Director shall be authorized to adjust and make payment of any claims for proved and approved losses covered by flood insurance, and upon the disallowance by the Director of any such claim, or upon the refusal of the claimant to accept the amount allowed upon any such claim, the claimant, within one year after the date of mailing of notice of disallowance or partial disallowance by the Director, may institute an action against the Director on such claim in the United States district court for the district in which the insured property or the major part thereof shall have been situated, and original exclusive jurisdiction is hereby conferred upon such court to hear and determine such action without regard to the amount in controversy.
The full text of 44 C.F.R. Pt. 62, App. A, Art. III (D)(4) is as follows: Limitation on Litigation Costs. Following receipt of a notice of [a suit against a WYO insurer], the Office of General Counsel (OGC), FEMA, shall review the information submitted. If it is determined that the claim is grounded in actions by the Company that are outside the scope of this Arrangement, the National Flood Insurance Act, and 44 C.F.R. chapter 1, subchapter B, and/or involve issues of insurer/agent negligence as discussed in Article IX of this arrangement, the OGC shall make a recommendation to the Administrator as to whether the claim is grounded in actions by the Company that are significantly outside the scope of this Arrangement. In the event the Administrator determines that the claim is grounded in actions by the Company that are significantly outside the scope of this Arrangement, the Company will be notified in writing, withing thirty (30) days of the Administrator's decision, if the decision is that any award or judgment for damages arising out of such actions will not be recognized under Article III of the Arrangement as a reimbursable loss cost, expense or expense reimbursement.
D.
The Fourth Circuit has not yet had occasion to determine whether state law extra-contractual claims are preempted by the NFIA. Battle v. Seibels Bruce Ins. Co., 288 F.3d 596, 609 n. 20 (4th Cir. 2002). Based on the statutory and regulatory provisions discussed above covering claims handling, and the fact that WYO companies do not receive a commission unless they pay a claim, the majority of courts who have considered the preemption issue have concluded that WYO insurers should not be subject to potential tort liability, such as bad faith or unfair and deceptive trade practices, for their conduct in the handling of claims, see Gibson v. American Bankers Ins. Co., 289 F.3d 943 (6th Cir. 2002) (discussing cases), Jamal v. Travelers Lloyds of Texas Ins. Co., 129 F. Supp.2d 1024 (S.D. Tex. 2001), Messa v. Omaha Prop. Cas. Ins. Co., 122 F. Supp.2d 513, 522-23 (D.N.J. 2000).The standard flood insurance application form, as promulgated by FEMA pursuant to Congressional authority, does not ask whether an entity seeking building coverage is an owner of the building. Studio Frames asserts that Standard Fire should have altered the standard form application by ascertaining whether Studio Frames was the owner of the building or a tenant in the building. Pursuant to statutes enacted by Congress and regulations promulgated by FEMA, Standard Fire must strictly comply with the national flood insurance program and does not have the authority to alter the standard flood insurance application. Imposition of a duty to do so based on state law would directly conflict with federal statutes and regulations. If an unfair and deceptive trade practice claim were allowed to be added in this case, it would be impossible for Standard Fire to comply with both state law and federal law. Studio Frames' Motion to Amend the Complaint to add an unfair and deceptive trade practice claim is DENIED due to conflict preemption.
III.
In conclusion, Studio Frames' Motion to Amend its complaint to add a claim of unfair and deceptive trade practices is DENIED. Because the motion to amend is denied, the Motion to Extend Discovery is MOOT.