Tuesday, March 27, 2018

Elhouty v. Lincoln Benefit Life Co. (9th Cir. - March 27, 2018)

You can see why the Ninth Circuit comes out this way.  It's a litigation over a $2 million life insurance policy.  The panel says that such a dispute meets the amount in controversy requirement for federal diversity jurisdiction because $2 million is greater than $75,000.

Okay.  That's a nice, simple, bright-line rule.  In litigation about an insurance policy, the amount in controversy is the face value of the policy.  That's the test.  As Judge Kleinfeld puts it, "clarity and predictability are more valuable than whatever theoretical precision some more subtle measure would provide."

Judge Kleinfeld's rule would clearly be the right one if the litigation was about who owns the policy proceeds of a $2 million policy upon, say, the policyholder's death.  But that's not this case.  Rather, here, the policyholder is alive, and merely wants the right to continue to pay the policy premium -- which is around $30,000 to $50,000 -- to keep his $2 million policy.  In other words, he only gets $2 million if he (1) wins, and (2) dies.  Otherwise he's just flushed tens of thousands of dollars down the toilet.  Recovery of $2 million is speculative.  To put it another way, the policy that he wants to obtain is indisputably not worth $2 million.  No one would pay $2 million for it.  It's instead worth less.  So it seems strange to value the dispute over this piece of property as worth $2 million.

And Judge Kleinfeld's (admittedly straightforward) rule seems to create problems in other realms as well.  Suppose that I have a $2 lottery ticket for next month's lottery (the top prize of which is $40 million), some guy says its his ticket and not mine, and he sues me in federal court for the ticket.  The ticket's worth only $2, so you'd think that the amount in controversy requirement wouldn't be satisfied and we'd have to be in state court.  But under Judge Kleinfeld's rule, there'd be federal jurisdiction because the amount in controversy would be $40 million -- the "face value" of the lottery ticket (i.e., how much the holder would win if the ticket "hit").  There's no substantive difference between in this regard between insurance policies and lottery tickets.  They both pay out only on the occurrence of specific future (uncertain) events.  So they'd both have the same rule.  Ditto for other similar things; e.g., a bet for $2 on a 100,000-1 longshot to win the 2019 NCAA Basketball Tournament.  All those penny-ante disputes get into federal court as well.  Just like the $2 million insurance policy I bought (hypothetically) for $1 on my oldest daughter potentially getting hit by the Chinese satellite that's about to reenter the atmosphere.  Welcome to federal court.

So I agree that the Ninth Circuit's rule is a simple one to apply.  But it's also one that does a fair piece of mischief.

Judge Bencivengo (sitting by designation from the Southern District of California) concurs in the result but doesn't agree with the panel's test.  I'm sympathetic to her position.  But the problem with her view is that she doesn't articulate any alternative test.  She says that (1) the panel's test is the wrong one (which I understand), but (2) that she nonetheless concurs in the result because she too believes that subject matter jurisdiction exists.  But she doesn't say why for No. 2.  What's the test she's using?  Seems like that's important.  Particularly if you think the panel's test is the wrong one.

The obvious alternative test, at least to me, would rely on market value.  What's the market value of a speculative $2 million insurance policy (or $2 lottery ticket)?  Whatever a willing buyer and seller of such an item would agree upon.  Sure, that's sometimes unclear.  But no less clear with things like insurance policies than, say, a used 2011 Porche 911.  Maybe it's worth $71,000, maybe it's worth $78,000.  We take evidence and make a factual finding.  Real life's messy.  But at least it's real life.  Not some made-up figure that only exists in the relatively unlikely event that a dude dies, a team wins, a satellite crashes, or a lottery ticket hits.