The uncertain status of the legal certainty test: the need for consistency among federal courts when determining the amount-in-controversy.

• Author: Hurstak, Robert A.

INTRODUCTION

For the federal courts, jurisdiction is not automatic and cannot be presumed. Thus, the presumption in each instance is that a federal court lacks jurisdiction until it can be shown that a specific grant of jurisdiction applies. Federal courts may exercise only that judicial power provided by the Constitution in Article III and conferred by Congress. All other judicial power or jurisdiction is reserved to the states. And although plaintiffs may urge otherwise, it seems settled that federal courts may assume only that portion of the Article III judicial power which Congress, by statute, entrusts to them. Simply stated, Congress may impart as much or as little of the judicial power as it deems appropriate and the Judiciary may not thereafter on its own motion recur to the Article III storehouse for additional jurisdiction. When it comes to jurisdiction of the federal courts, truly, to paraphrase the scripture, the Congress giveth, and the Congress takethaway. (1)

As former District Court Judge John Sirica confirmed in his famous 1973 Watergate opinion, the limited jurisdiction of federal courts in the United States is a fundamental element of our judicial system. (2) Indeed, a plaintiff may only bring a lawsuit in federal court if the cause of action satisfies the jurisdictional limitations of the Constitution and any further Congressional restrictions. (3) First, a plaintiff may bring a claim in federal court if the cause of action arises "under this Constitution, the Laws of the United States, and Treaties made, or which shall be made, under their Authority." (4) Second, if the plaintiff s cause of action does not arise under federal law but is against a citizen of a different state, he may bring his suit in federal court under diversity jurisdiction. (5) In diversity cases, Congress has further limited the jurisdiction of federal courts by enacting 28 U.S.C. [section] 1332, which grants federal courts original jurisdiction in diversity cases only if the dispute exceeds a monetary threshold amount. (6)

Although Congress established a jurisdictional threshold, it did not establish statutory guidelines for determining when the monetary requirement is satisfied, and therefore judicial interpretation has guided federal courts' determination of the amount in controversy. (7) In St. Paul Mercury Indemnity Company v. Red Cab Company, (8) the Supreme Court announced the "legal certainty" test, holding that "the sum claimed by the plaintiff controls if the claim is apparently made in good faith" and that "[i]t must appear to a legal certainty that the claim is really for less than the jurisdictional amount to justify dismissal." (9) Since the Red Cab decision, federal courts have split as to what courts may consider when determining if the amount in controversy exceeds the jurisdictional threshold. (10) Circuit courts that follow the minority approach have applied Red Cab strictly, holding that only the plaintiff's good faith claim controls. (11) Under the majority approach, however, circuit courts have held that courts sitting in diversity may look beyond the pleadings to determine whether subject matter jurisdiction is present. (12) To date, the Supreme Court has not resolved this split, and therefore a lawsuit that could be heard in one circuit on diversity grounds could be dismissed in another circuit for want of jurisdiction. (13)

This Note will argue that a limited application of the majority approach is the sound analytical method for determining whether the amount in controversy exceeds the jurisdictional threshold. (14) Part I will examine the historical interpretation of the amount in controversy requirement, focusing on attempts by the Supreme Court to establish guidelines for lower federal courts to follow. (15) Part II will discuss the competing applications of the Red Cab standard, and the inconsistency inherent in the circuit court split. (16) Part III will argue that a limited application of the majority rule is the logical solution to resolving the current split among the circuits. (17) Specifically, this Note will argue that where subject matter jurisdiction depends on the court's determination of the enforceability of a state statutory or contractual limitation on damages, federal courts sitting in diversity should dismiss these cases for want of jurisdiction. (18) In all other cases, the Red Cab standard should control, and federal courts should not consider other defenses to defeat diversity jurisdiction. (19) Ultimately, this Note will advocate that adopting this limited application of the majority rule would resolve the split among the courts and eliminate the inconsistent outcomes of diversity actions in the circuit courts. (20)

1. HISTORICAL DEVELOPMENT OF THE AMOUNT IN CONTROVERSY REQUIREMENT

   The United States Constitution contains no requirement that diversity cases exceed a minimum monetary threshold. (21) The expansive jurisdictional grants conferred in Article III, [section] 2 of the Constitution, however, established the outer boundaries of federal court jurisdiction, and Article III, [section] 1 granted Congress the power to narrow the reach of that jurisdiction. (22) Indeed, Congress has limited the jurisdiction of federal courts sitting in diversity by enacting 28 U.S.C. [section] 1332 ("Section 1332"). (23)

   While it is not entirely apparent from the legislative history of Section 1332, the conventional rationale for its enactment was to allow foreign plaintiffs access to a forum that would be free of the potential prejudice of state courts. (24) Congress did not intend to grant an unlimited right of access, however, and thus included additional restrictions in the diversity statute. (25) This Note focuses on one such limitation--the amount in controversy threshold that a plaintiff must satisfy to invoke diversity jurisdiction. (26)

   Since the enactment of Section 1332, and specifically the inclusion of an amount in controversy requirement, scholars have promulgated numerous bases for its existence. (27) The early prevailing view was that Congress wanted to ensure that out-of-state plaintiffs could not subject defendants to suit in distant forums for insignificant claims. (28) A more modern and perhaps more practical justification for the monetary requirement is to maintain a manageable caseload in the federal courts. (29) The inability of the parties to waive subject matter jurisdiction may provide additional support for this latter explanation. (30)

   Subject matter jurisdiction is a fundamental tenet of the American judicial system, and its significance is reflected in the fact that either of the litigating parties may raise the issue or a court may raise it sua sponte. (31) In diversity cases, however, whether subject matter jurisdiction exists is not always clear from the pleadings or even during the early stages of trial. (32) For instance, the state citizenship of a litigating party may be unclear, which could defeat the complete diversity requirement established in Strawbridge v. Curtiss (33) While some of this confusion has been resolved through judicial interpretation and Congressional legislation, the method of determining whether the litigation exceeds the jurisdictional threshold remains a conflict among the circuit courts that has lingered for over a century. (34) To date, the Supreme Court has yet to adopt a uniform rule for federal courts to apply in making this determination. (35)

   Since the enactment of Section 1332, the Court repeatedly has addressed the difficulty in determining whether the cause of action exceeds the amount in controversy, and has provided some guidelines for analyzing the issue. (36) In Mississippi & Missouri Railroad Co. v. Ward, (37) the Court faced the question of whether the cause of action satisfied the jurisdictional amount where the relief sought was injunctive rather than monetary. (38) In Ward, the plaintiff steamboat owner sought an abatement of a bridge that he argued was a nuisance. (39) The Court concluded that to determine whether the action seeking injunctive relief exceeded the amount in controversy, "the value of the object must govern." (40) Without any further substantive analysis as to what it meant by the "value of the object," however, the Ward Court provided little guidance for future determinations of amount in controversy disputes. (41)

   The seminal Supreme Court decision concerning the amount in controversy requirement for diversity jurisdiction came down in 1938 in Red Cab, nearly eight decades after the Court decided Ward. (42) In Red Cab, the respondent, an Indiana corporation, contracted with the petitioner, a Minnesota corporation, whereby the petitioner agreed to insure against losses or expenses incurred for claims of compensation for a thirty-day period. (43) The original complaint sought $4000 in damages, but after the defendant removed the case to federal court the plaintiff filed an amended complaint with an exhibit attached listing injuries totaling approximately one-third of that amount. (44) The District Court found for the plaintiff in the amount of $1162.98, but on appeal the Circuit Court of Appeals for the Seventh Circuit remanded to the state court for want of jurisdiction because the claims on the record did not satisfy the amount in controversy. (45) In reversing the Seventh Circuit, the Supreme Court held that where the plaintiff's claim is made in good faith, "it must appear to a legal certainty that the claim is really for less than the jurisdictional amount to justify dismissal." (46) The Court reasoned that the respondent had a good faith claim on the face of the pleadings to invoke federal jurisdiction, and a subsequent reduction after initial filing did not eliminate that jurisdiction. (47)

2. THE CURRENT COMPETING INTERPRETATIONS OF THE RED CAB STANDARD AMONG THE FEDERAL CIRCUITS

   While the "legal certainty" test adopted in Red Cab is seemingly straightforward in its...