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              IN THE UNITED STATES COURT OF APPEALS
                                                         FILED
                        FOR THE ELEVENTH CIRCUIT U.S. COURT OF APPEALS
                                                    ELEVENTH CIRCUIT
                         ________________________     MAR 29, 2001
                                                             THOMAS K. KAHN
                           Nos. 98-7015 & 99-10305                CLERK
                          ________________________

                      D. C. Docket No. 96-1117-CV-1-CB-C


ALEX W. NEWTON,

                                                       Plaintiff-Appellee,

                                    versus


CAPITAL ASSURANCE COMPANY, INC.,

                                                       Defendant-Appellant.

                          _______________________

                 Appeals from the United States District Court
                    for the Southern District of Alabama
                       _________________________
                             (March 29, 2001)

                       ON PETITION FOR REHEARING

Before ANDERSON, Chief Judge, HULL and COX, Circuit Judges.

COX, Circuit Judge:
      Capital Assurance Company’s Petition for Rehearing, which the United States

has supported as amicus curiae, is GRANTED. We agree with the United States that

the opinion published at 209 F.3d 1302 misinterpreted parts of the Federal Emergency

Management Agency’s Financial Assistance/Subsidy Arrangement, 44 C.F.R. pt. 62,

app. A, and that we arrived at the wrong result. That opinion is accordingly

VACATED and the following opinion issued in its stead:

      Capital Assurance Company, Inc. appeals the award of prejudgment interest in

an insurance contract action based on a federally subsidized Standard Flood Insurance

Policy it issued under Part B of the National Flood Insurance Act of 1968, 42 U.S.C.

§§ 4001-4041, 4071-4129 (1994 & Supp. II 1996) (NFIA). We address, for the first

time in this circuit, whether a district court violates sovereign immunity principles by

awarding prejudgment interest against a so-called “Write-Your-Own” company

empowered to issue flood insurance by the Federal Emergency Management Agency.

We hold that it does.

                                    I. Background

      Alex W. Newton owns a vacation house on the Gulf of Mexico that is

constructed on an artificially built-up point extending into the water and protected

only by bulkheads. Capital Assurance Company, Inc. (Capital) sold Newton a

federally subsidized Standard Flood Insurance Policy (SFIP) covering the property.


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The Federal Emergency Management Agency (FEMA) uses “Write-Your-Own”

(WYO) companies like Capital to aid it in its statutory duty to administer the National

Flood Insurance Program (NFIP). See 42 U.S.C. § 4081(a) (permitting FEMA’s

Director to enter into arrangements with private insurance companies in order to make

use of their “facilities and services”); 44 C.F.R. § 62.23(a)-(d) (establishing the WYO

program to permit private insurers to sell and administer SFIPs). In 1995 Newton’s

house and lot suffered predictable extensive flood damage from Hurricane Opal, and

Newton filed a claim.

       After Capital denied a portion of Newton’s claim, Newton sued in an Alabama

state court. The defendants removed the case, asserting original jurisdiction under 28

U.S.C. § 1331 and 42 U.S.C. § 4053. Following a bench trial, the court awarded

Newton compensatory damages, prejudgment interest, and costs. Capital appeals only

the award of prejudgment interest.1




       1
                Capital noticed appeal of the award of costs as well, but at oral argument the
parties stipulated to settlement of the costs issue.

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                             II. Subject-Matter Jurisdiction

        Although neither party has challenged the subject-matter jurisdiction of the

federal courts over this suit, we are compelled to address the question sua sponte, see,

e.g., Univ. of S. Ala. v. Am. Tobacco Co., 168 F.3d 405, 410 (11th Cir. 1999), because

both the record and answers we received to questions posed at oral argument betray

some confusion on the issue. In the district court, Newton at first filed a motion to

remand for lack of federal-question jurisdiction. Capital opposed the motion, again

asserting jurisdiction under 28 U.S.C. § 1331 and 42 U.S.C. § 4053. For reasons

unclear from the record, Newton later conceded federal-question jurisdiction. We

now clarify that the district court had federal-question jurisdiction under 28 U.S.C. §

1331.

There are three statutes that potentially affect federal-question jurisdiction in this case:

the general “arising under” jurisdiction provision of 28 U.S.C. § 1331 and two

provisions of the NFIA, 42 U.S.C. § 4053 and 42 U.S.C. § 4072. We begin by

dispensing with § 4053; Capital’s reliance on that section was misplaced. Under 42

U.S.C. § 4041, the Director of FEMA may implement the NFIP using one of two

different institutional structures, each of which specifies a different role for private

insurance companies. The first scheme, described in 42 U.S.C. §§ 4051-4056,

includes a provision for suing private insurers, § 4053. The NFIP is, however, not


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currently implemented under that scheme. It is instead implemented under the

alternative structure set forth in 42 U.S.C. §§ 4071-4072. See Van Holt v. Liberty

Mut. Fire Ins. Co., 163 F.3d 161, 165 (3d Cir. 1998). It is thus clear from the statute

and the current implementation of the program that § 4053 does not apply to this suit.

We next turn to 28 U.S.C. § 1331. Under that section, federal courts have federal-

question jurisdiction over suits “in which a well-pleaded complaint establishes either

that federal law creates the cause of action or that the plaintiff’s right to relief

necessarily depends on resolution of a substantial question of federal law.” Franchise

Tax Bd. v. Constr. Laborers Vacation Trust, 463 U.S. 1, 27-28, 103 S. Ct. 2841, 2856

(1983). The federal cause of action or question of federal law must be apparent from

the face of the well-pleaded complaint and not from a defense or anticipated defense.

See id. at 9-11, 103 S. Ct. at 2846-47. But the federal question need not be statutory;

federal common law will suffice. See Nat’l Farmers Union Ins. Co. v. Crow Tribe,

471 U.S. 845, 850, 105 S. Ct. 2447, 2451 (1985). Here, the complaint alleged, among

other things, breach of an SFIP contract. SFIP contracts are interpreted using

principles of federal common law rather than state contract law. See, e.g., Carneiro

da Cunha v. Standard Fire Ins. Co./Aetna Flood Ins. Program, 129 F.3d 581, 584

(11th Cir. 1997) (“‘As contracts, the standard policies issued under the Program are

governed by federal law, applying “standard insurance law principles.”’” (quoting


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Wright v. Dir., Fed. Emergency Mgmt. Agency, 913 F.2d 1566, 1570-71 (11th Cir.

1990))). Thus, a complaint alleging breach of an SFIP satisfies § 1331 by raising a

substantial federal question on its face.

      This leaves us only to question whether 42 U.S.C. § 4072, the provision for

suits against FEMA under the NFIP as currently implemented, affects our jurisdiction.

On its face, § 4072 provides only for suits against FEMA. It does not discuss the

WYO program, and we therefore do not read it as addressing suits against WYO

companies. It does not, therefore, abrogate § 1331 jurisdiction. See Carneiro da

Cunha, 129 F.3d at 586-87 (implicitly recognizing federal subject-matter jurisdiction

over a suit against a WYO company after the implementation of § 4072). We need

not consider the opposite question: whether it provides an additional basis for

jurisdiction against WYO companies, see Van Holt, 163 F.3d at 165-66 (finding WYO

companies subject to jurisdiction under § 4072 (as well as § 1331) because a suit

against a WYO company is the “functional equivalent” of a suit against FEMA),

because our conclusion regarding jurisdiction under § 1331 is sufficient to answer the

jurisdictional question we raise.

                              III. The No-Interest Rule

      The issue Capital presents in this appeal is whether prejudgment interest awards

in suits against WYO companies selling federally sponsored SFIP contracts violate


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the “no-interest rule,” the sovereign immunity principle that “[i]n the absence of

express congressional consent to the award of interest separate from a general waiver

of immunity to suit, the United States is immune from an interest award.” Library of

Congress v. Shaw, 478 U.S. 310, 314, 106 S. Ct. 2957, 2961 (1986). Although suits

against WYO companies are not suits against the federal government, Capital

nevertheless contends that prejudgment interest awards against WYO companies

always violate the no-interest rule because such awards constitute — as a legal

conclusion derived from the NFIA and its implementing regulations — “direct

charge[s] on the public treasury.” In re Estate of Lee, 812 F.2d 253, 256 (5th Cir.

1987). Newton, on the other hand, argues that the controlling laws give the

government no more than a “financial stake” in the payment of prejudgment interest

by WYO companies, which is, as the district court held, insufficient by itself to invoke

the no-interest rule in a given case. West v. Harris, 573 F.2d 873, 882 (5th Cir.

1978).2 We review the question de novo, see Powers v. United States, 996 F.2d 1121,

       2
                West v. Harris, 573 F.2d 873 (5th Cir. 1978), affirmed a prejudgment interest
award against a private company selling federal flood insurance. Our holding in this case does
not conflict with it, however; West was decided at a time when the structure of the NFIP
involved a more attenuated relationship between private insurance companies selling flood
insurance and the federal agency running the NFIP. The “Industry Program With Federal
Financial Assistance” at issue in West, 42 U.S.C. subch. II, pt. A, involved a pool of private
insurers selling flood insurance under an agreement between the pool as an entity (rather than
individual insurers) and the government (then represented by the Department of Housing and
Urban Development (HUD)). See 42 U.S.C. §§ 4051-4052. HUD provided only reinsurance
coverage when necessary and payments to the pool to make up for the issuance of insurance at
less-than-actuarial rates. See §§ 4054-4055. The insurance companies were, under explicit

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1123 (11th Cir. 1993), and hold that the no-interest rule prohibits awards of

prejudgment interest against WYO companies.

       We start our analysis by recognizing that those circuits considering the question

have, for important reasons, found the no-interest rule to bar awards of interest in suits

directly against FEMA. See Sandia Oil Co. v. Beckton, 889 F.2d 258, 263 (10th Cir.

1989) (holding, on reasoning equally applicable to awards of prejudgment interest,

that postjudgment interest may not be awarded in suits directly against FEMA); Lee,

812 F.2d at 256. To begin with, the cases note that nothing in the NFIA indicates a

Congressional waiver of immunity from interest awards. See Lee, 812 F.2d at 256;

see also Sandia Oil, 889 F.2d at 262 (citing Lee). Nor, as one court has further

concluded, does the NFIP produce a profit for the federal government against which

interest awards may sometimes be appropriate because the government’s role

resembles that of a profit-making, private entity. The NFIP is a subsidy program.3


statutory provisions, exclusively responsible for adjusting claims, paying claims, and defending
suits arising from disallowed claims, see § 4053. See also Van Holt, 163 F.3d at 165; Berger v.
Pierce, 933 F.2d 393, 394-95 (6th Cir. 1991) (both recounting the history of the NFIP). By
contrast, as Capital notes, today’s NFIP is a “Government Program With Industry Assistance.”
42 U.S.C. subch. II, pt. B. As we explain in the text, in this scheme the money to pay claims
comes from a federally administered fund rather than a subactuarial insurance pool.
        3
                 On this point, the Tenth Circuit has found an exception to the no-interest rule for
engagement in profitable “‘commercial enterprise’” inapplicable. Sandia Oil, 889 F.2d at 261
(quoting Shaw, 478 U.S. at 317 & n.5, 106 S. Ct. at 2963 & n.5). The court compared the
holdings in the controlling cases, United States v. Worley, 281 U.S. 339, 50 S. Ct. 291 (1930)
and Standard Oil Co. v. United States, 267 U.S. 76, 45 S. Ct. 211 (1925), both of which dealt
with coverage disputes over insurance sponsored and sold by the United States government. It
noted that Worley, in which prejudgment interest was barred, distinguished Standard Oil, in

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The holdings of our sister circuits are consistent with the Supreme Court’s articulation

of the no-interest rule. See Shaw, 478 U.S. at 314-17, 106 S. Ct. at 2961-63.

Moreover, Newton concedes that both Lee and Sandia Oil were correctly decided. We

use their conclusions as a starting point and examine the relationship between FEMA

and WYO companies to determine whether the no-interest rule bars prejudgment

interest awards against WYO companies as well.

       Capital urges us to accept a dictum from the Fifth Circuit that any award of

prejudgment interest against a flood insurer is “a direct charge on the public treasury”

indistinguishable from identical awards in suits against FEMA itself and is thus

precluded by the no-interest rule. Lee, 812 F.2d at 256 (making the statement in the

context of a suit directly against FEMA). Cf. Gowland v. Aetna, 143 F.3d 951, 954-55

(5th Cir. 1998) (referring to Lee’s “direct charge” language and prohibiting

application of the doctrine of equitable estoppel against a WYO company because the

doctrine could not be applied against the federal government). To even entertain this

idea, we must accept the proposition that the no-interest rule can ever apply to shield

private entities from interest awards. We can do so because we recognize that



which prejudgment interest was allowed, because the government insurance program addressed
in Standard Oil was profitable while the program considered in Worley was not. See id. at 262-
63 (citing Worley, 281 U.S. at 343, 50 S. Ct. at 293). Because the federal government subsidizes
rather than profits from the NFIP, the Tenth Circuit reasoned that the commercial enterprise
exception cannot apply to the NFIP. See id. at 263-64.

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Congress should be able to implement federal programs using private entities rather

than government agencies without necessarily waiving protection of program funds

under the no-interest rule. We also recognize, however, that the rule as applied to

private entities should be a narrow one applicable only when the interest charge really

is, for all relevant purposes, directly against the federal government. To conclude

otherwise would allow private entities to use the no-interest rule to protect their purely

private concerns rather than public programs. This is why, as West holds, “a financial

stake in . . . [the flood insurance] program is not sufficient to cloak . . . [a] defendant

[insurance company] with the robe of sovereign immunity from awards of any

interest.” West, 573 F.2d at 882.

       Even under this narrow view, however, Capital contends that the no-interest

rule protects it from the award in this case because the regulations detailing the

financial relationship between FEMA and WYO companies establish that interest

charges against WYO companies are direct charges against FEMA. We agree.

Capital begins by noting that although WYO companies initially collect premiums

from which they must pay claims (including those ordered paid only as a result of

litigation), and refunds, see 44 C.F.R. pt. 62, app. A, arts. II(E), III(D)(1)-(2), III(E),

the amount of the collected premiums actually controlled by and immediately

available to the WYO companies is severely curtailed by the regulations. Premiums


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received must be kept in separate accounts, id. app. A, art. II(E), and all funds not

required to meet current expenditures must be remitted to FEMA, id. app. A, art.

VII(B). When the scant funds retained by the WYO company are not enough to

satisfy outstanding claims and refunds, the WYO companies must draw upon letters

of credit from FEMA. Id. app. A, art. IV(A). Because premiums collected on the

policies do not belong to the WYO insurers, see id. app. A, art. VII(B), claim

payments come out of FEMA’s pocket regardless of how they are paid.

      Capital also points out the functionary status of the WYO companies in relation

to FEMA. Under the statute, WYO companies act as the “fiscal agents of the United

States,” 42 U.S.C. § 4071(a)(1); see also 44 C.F.R. § 62.23(f) (characterizing the

relationship between the federal government and WYO companies as “one of a

fiduciary nature” and intended to “assure that any taxpayer funds are accounted for

and appropriately expended”). WYO companies may not alter the terms of SFIPs, or

insert flood coverage into other policies. 44 C.F.R. § 62.23(c), (h)(6). Finally, they

must adjust claims under NFIP guidelines. Id. § 62.23(i)(1).

      Capital persuades us with these points — FEMA’s inevitable liability for claims

and its substantial administrative oversight —       to join our fellow circuits in

concluding that the line between a WYO company and FEMA is too thin to matter for

the purposes of federal immunities such as the no-interest rule. See Flick v. Liberty


                                         11
Mut. Fire Ins. Co., 205 F.3d 386, 393-94 (9th Cir.) (relying on unlikelihood that

claims will be paid out of premiums, rather than federal fund, to conclude that WYO

policies are federal insurance policies financed by congressional authorization, and

that the Appropriations Clause therefore prohibits any “substantial compliance”

softening of proof-of-loss requirements), cert. denied, 121 S. Ct. 305 (2000); Van Holt

v. Liberty Mut. Fire Ins. Co, 163 F.3d 161, 166-67 (3d Cir. 1998) (concluding that a

suit against a WYO insurer is, for jurisdictional purposes, “in reality” a suit against

FEMA because FEMA pays the judgment and litigation costs); Gowland v. Aetna, 143

F.3d 951, 954-55 (5th Cir. 1998) (because losses WYO policies are paid from federal

funds, a WYO insurer cannot waive a right to a proof-of-loss statement, or be

equitably estopped from demanding one).

      Newton does point to countervailing considerations that might suggest that

payment of claims is not a direct charge on federal funds. First, the regulations amply

demonstrate that the role accorded WYO companies is in minor respects more than

that of mere functionary. WYO companies may issue policies in their own names (as

Capital issued Newton’s) rather than in that of FEMA or the United States, see 44

C.F.R. § 61.13(f), and they may use their own, individual “customary business

practices”, id. § 62.23(a); see also id. § 62.23(e). For example, a WYO company may

accept an application previously rejected by another WYO company. See id. §


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62.23(h)(5). Similarly, WYO companies adjust claims in accordance with their own

“general [c]ompany standards,” although they must seek guidance from “NFIP

[c]laims manuals.” Id. § 62.23(i)(1). Finally, the regulations expressly deny that

WYO companies are general agents of the government; the companies are thus

“responsible for their obligations to their insureds under any flood insurance policies

issued.” Id. § 62.23(g).     WYO companies, rather than FEMA, are thus initially

responsible for the “adjustment, settlement, payment and defense” of claims on the

policies they sell. Id. § 62.23(d) (emphasis added). A WYO company choosing to

defend against a claim must therefore seek reimbursement for its costs rather than

merely handing the case over to FEMA. See id. § 62.23(i)(6) (“[D]efense costs will

be part of the . . . claim expense allowance . . . .”). Reimbursement may be limited,

moreover, if a WYO company fails to meet certain documentation requirements. See

id. pt. 62, app. A, art. III(D)(2).

       But the reality lying behind these observations robs them of their strength. A

WYO company may write a policy in its name, but FEMA dictates the terms. And

preliminary responsibility is a mirage when the federal government, through FEMA,

will always foot the full bill in the end. Giving these factors controlling weight would

elevate the form of the insurance system over its substance. We thus conclude that

prejudgment interest awards against WYO companies are direct charges on the public


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treasury forbidden by the no-interest rule and reverse the part of the judgment

awarding such interest. The remainder of the judgment is unchallenged, and it is

accordingly affirmed.

      AFFIRMED IN PART; REVERSED IN PART.




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