was the New York Superintendent of Insurance were not barred by diversity requirement or sovereign immunity); Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Cavicchia, 311 F. Supp. 149, 157 (S.D.N.Y. 1970) (appointment by state of receiver for insurance company and presence of state as nominal party did not entitle state to sovereign immunity in interpleader action).
The courts in these cases reasoned that the litigation would not directly affect the state treasury, Finkielstain, 857 F.2d at 895-96; Foremost, 826 F.2d at 1388; Excess, 656 F.2d at 497; Skandia, 441 F. Supp. at 722; that no wrongdoing was alleged by the agency itself nor was any relief sought from the agency itself, Foremost, 826 F.2d at 1387; that the relief sought would not restrain the state from acting or compel it to act, Foremost, 826 F.2d at 1387; Excess, 656 F.2d at 497; and that the agency was involved in the case only because of its status as a receiver, Foremost, 826 F.2d at 1387. These courts also noted that the state did not become the real party in interest even though the litigation may implicate a genuine state interest in protecting the general welfare of its citizens. Excess, 656 F.2d at 498; Skandia, 441 F. Supp. at 722.
In contrast, in those cases which have found states to be the real parties in interest, the insurance commissioners were parties not in their capacity as receivers, but rather as state agencies or officials directly asserting significant state interests. See, e.g., Levinson v. Continental Insurance Services, Inc., 655 F. Supp. 275 (D. Del. 1987) (remanding to state court for lack of diversity jurisdiction a case brought by Delaware Insurance Commissioner to invalidate agreement reached by predecessor); Gunter v. AGO International, 533 F. Supp. 86, 88 (N.D. Fla. 1981) (remanding case for lack of diversity where commissioner had sued to enjoin violation of state law); National Market Reports, Inc. v. Brown, 443 F. Supp. 1301, 1305 (S.D. W. Va. 1978) (dismissing case brought against West Virginia Insurance Commissioner to enjoin enforcement of state ordinance).
The Court agrees with this body of case law that where the state insurance officer is a party only because of his status as receiver or liquidator of an insurance company, the state is not the real party in interest. Because the Superintendent appears in this case solely as the liquidator of AFFI's estate, his supplemental motion to dismiss on the basis of lack of diversity and sovereign immunity is denied.
The Superintendent has filed a motion for summary judgment on the ground of abstention, requesting that the Court dismiss this case in deference to the liquidation proceedings in New York. He argues that abstention is proper under the various abstention doctrines set out in Burford v. Sun Oil Co., 319 U.S. 315, 63 S. Ct. 1098, 87 L. Ed. 1424 (1943), Younger v. Harris, 401 U.S. 37, 91 S. Ct. 746, 27 L. Ed. 2d 669 (1971), and Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 96 S. Ct. 1236, 47 L. Ed. 2d 483 (1976). If any abstention doctrine is applicable in this case, it is that of Burford rather than Younger or Colorado River. Although some courts have found abstention appropriate in cases involving state insurance liquidation proceedings based on Younger or Colorado River, those courts have done so only after finding that abstention was appropriate under Burford. See, e.g., Levy v. Lewis, 635 F.2d 960 (2d Cir. 1980); Aims Enterprises, Inc. v. Muir, 609 F. Supp. 257, 259-262 (M.D. Pa. 1985). Others have found Younger and Colorado River inapplicable even though Burford was applicable. See, e.g., Law Enforcement Insurance Co. v. Corcoran, 807 F.2d 38, 43-44 (2d Cir. 1986), cert. denied, 481 U.S. 1017, 107 S. Ct. 1896, 95 L. Ed. 2d 503 (1987). See also Lac D'Amiante du Quebec v. American Home Assurance Co., 864 F.2d 1033 (3rd Cir. 1988) (not reaching Colorado River because abstention appropriate under Burford anyway). This Court has not, however, located any precedents finding Burford inapplicable but finding Younger or Colorado River applicable. The Burford analysis most closely describes this case; if abstention is not appropriate under Burford, it is not appropriate under Younger or Colorado River. The Court will therefore consider solely the Burford doctrine.
Burford requires a federal court to dismiss the case where the state has established a complex regulatory scheme and exercise of federal jurisdiction would "be disruptive of state efforts to establish a coherent policy with respect to a matter of substantial public concern." Colorado River, 424 U.S. at 814, 96 S. Ct. at 1245. A federal court should abstain if the state law issue is complex, the state court has a special expertise on the issue, and there is a need for coherent state doctrine in the area. Ryan v. State Board of Elections, 661 F.2d 1130, 1135 (7th Cir. 1981). However, Burford abstention applies "only if federal review of a difficult question of state law would disrupt state efforts to establish a coherent policy respecting a matter whose importance transcends the result in the case under consideration." Evans v. City of Chicago, 689 F.2d 1286, 1295 (7th Cir. 1982), overruled on other grounds, 873 F.2d 1007 (7th Cir. 1989), cert. denied, U.S. , 110 S. Ct. 2560, 109 L. Ed. 2d 742 (1990).
The requirements of Burford abstention have often been found to be met where a state official acting as receiver for an insolvent insurance company is a defendant in a federal lawsuit brought by a creditor of the company. See, e.g., Lac D'Amiante, 864 F.2d at 1048; Law Enforcement, 807 F.2d at 43-44 (2d Cir. 1986); Aims Enterprises, 609 F. Supp. at 259-262 (M.D. Pa. 1985).
Similarly, courts have abstained from deciding lawsuits filed by state officials in state courts to recover assets on behalf of insolvent insurance companies when those cases have been removed to federal court. See, e.g., Grimes v. Crown Life Insurance Co., 857 F.2d 699, 706 (10th Cir. 1988), cert. denied, 489 U.S. 1096, 109 S. Ct. 1568, 103 L. Ed. 2d 934 (1989); Corcoran v. Ardra Insurance Co., 842 F.2d 31 (2d Cir. 1988); Corcoran v. Universal Reinsurance Corp., 713 F. Supp. 77 (S.D.N.Y. 1989). See also Levy v. Lewis, 635 F.2d 960 (2d Cir. 1980) (abstaining from federal lawsuit filed to challenge action of liquidator after liquidator had sought state court approval of his action); Cash Currency Exchange, Inc. v. Shine, 762 F.2d 542, 556 (7th Cir.) (approving of Levy), cert. denied, 474 U.S. 904, 106 S. Ct. 233, 88 L. Ed. 2d 232 (1985).
The question next arises whether this case is governed by the same principles or rather is sufficiently different from those cases that Burford abstention is not warranted. One difference emphasized by GRS and the SBA is that the federal interpleader action is the only forum in which the rights of all parties can be protected. The Superintendent responds that all parties' rights can indeed be protected, pointing out that agencies of the United States have the opportunity to assert a claim in the context of a state insurance company liquidation proceeding. See, e.g., State of Idaho ex rel. Soward v. United States, 858 F.2d 445 (9th Cir. 1988) (Internal Revenue Service submitted claims in liquidation proceeding), cert. denied, 490 U.S. 1065, 109 S. Ct. 2063, 104 L. Ed. 2d 628 (1989).
GRS responds that it is still subject to the SBA's claim that GRS owes the disputed amount directly to the SBA even if GRS turns the money over to the Superintendent. No party has submitted any authority which tends to show whether the state liquidation proceedings can protect the rights of all parties. The Court therefore leaves this question unanswered, but will consider this concern in its analysis.
GRS also contends that abstention is inappropriate here because this case involves a simple issue of federal law. The cases which have addressed abstention in the face of state liquidation proceedings have treated the existence of a federal, rather than state, issue as important but not determinative. See, e.g., Levy, 635 F.2d at 964 (existence of federal issue did not preclude abstention where the federal issue was almost identical to a state claim for breach of contract and exercise of federal jurisdiction would significantly disrupt liquidation proceedings).
In this case, the issue on the merits is whether the SBA is entitled to collect from GRS the amount which the SBA claims on the judgment before GRS pays the judgment to the Superintendent. This is not an issue of how the assets of AFFI are to be distributed, but rather an issue of whether the portion of the judgment claimed by the SBA may be considered an asset of AFFI in the first place. In its motion for summary judgment, the SBA relies on federal statutory law and common law principles of subrogation and equitable ownership. The Superintendent opposes the SBA's motion on the grounds that there are disputed issues of material fact, that the SBA has no claim against GRS itself, and that the SBA has no claim to the judgment until it is collected by the Superintendent. The claims and defenses raised in connection with the motion to dismiss thus raise matters which are of federal, rather than state, concern.
Another factor that distinguishes this case from the typical abstention cases is that there is no claim against the existing estate of AFFI. Indeed, this is not even a case where the liquidator is attempting to recover assets that will be distributed to AFFI's creditors; the Superintendent does not dispute that the SBA will eventually be entitled to its pro rata share of the net proceeds.
Some courts have abstained in circumstances where the liquidator is attempting to recover assets for the estate rather than to avoid losing assets, for the reason that the liquidator's collection of assets is an important aspect of the liquidation proceedings and affects the amount available for distribution to creditors. See, e.g., Ardra, 842 F.2d at 37. In this case, however, the lack of any substantial dispute that the SBA is eventually entitled to its claim diminishes any effect that the exercise of federal jurisdiction would have on the liquidation proceedings.
This case thus differs from the typical case in which abstention is warranted in several ways, including the uncertainty as to whether the rights of all parties can be protected in any other proceeding, the presence of an issue of federal law, and the minimal intrusion on the state liquidation proceedings. Although any of these factors in themselves might not suffice to compel exercise of federal jurisdiction, their combination in one case makes abstention inappropriate.
This result finds support in Equitable Life Assurance Society v. Porter-Englehart, 867 F.2d 79 (1st Cir. 1989). In that case, an insurance company brought an interpleader action alleging that the proceeds of a life insurance policy were subject to conflicting claims. The proceeds were claimed both by the first wife of the decedent, as trustee for her children, and by the decedent's second wife, who argued that the proceeds should go to the estate, of which she was the administratrix. The second wife, after losing in the trial court, argued that the court should have declined to hear the case in deference to the proceedings in the probate court. The court of appeals, rejecting this argument, stated:
Since life insurance policies must be paid directly to the designated beneficiary rather than distributed through the probate estate, a federal declaration concerning such proceeds in no way interferes with the work of the probate court. By asserting that the money should be paid to the estate so that the administratrix may determine who receives it, appellant begs the threshold question of the estate's entitlement.
867 F.2d at 83. Of course, the initial issue of whether, as in Equitable, the SBA is entitled to receive the proceeds directly rather than awaiting distribution through the liquidation proceedings is yet to be decided; it is the issue on the merits in this action. However, if the SBA is correct, then the reasoning of Equitable is equally applicable to this case.
For all of the above reasons, abstention is improper in this action and the Court must exercise its jurisdiction.
V. MOTION TO INTERVENE
After this action was filed, and after the Court denied the Superintendent's motion to dismiss, the law firm of Antonow & Fink filed a motion to intervene. Antonow & Fink alleges that it performed work for AFFI in connection with the recovery of the judgment against GRS, and that it holds an attorney's lien in the amount of $ 46,675.62 against the proceeds for reimbursement of the costs of that work. GRS has since amended its interpleader complaint to name Antonow & Fink as a third claimant to the proceeds of the judgment.
The Superintendent opposes Antonow & Fink's motion on the ground that all unsecured creditors of AFFI are required, by order of the New York court, to submit their claims for resolution in the liquidation proceedings. Antonow & Fink responds that the claim it asserts is not so much against AFFI as against the proceeds of the judgment, which do not inure to the estate of AFFI until the amount owed to Antonow & Fink is deducted. In light of the Court's ruling with respect to abstention, the fund is before the Court for resolution of ownership issues. Sending Antonow & Fink to the liquidation court would thus be nonsensical.
The SBA opposes Antonow & Fink's motion on the ground that Antonow & Fink is no different than any creditor of AFFI -- that "their entitlement to any funds is not based on a claim for these specific funds as is the interest of" the SBA. (SBA Mem. in Response at 2.) This argument overlooks the nature of the claim asserted by Antonow & Fink, which is that its attorney's lien does give it a right to these specific proceeds as opposed to a general claim against the assets of AFFI.
Rule 24 of the Federal Rules of Civil Procedure provides that an applicant is entitled to intervene as of right when it "claims an interest relating to the property or transaction which is the subject of the action and the applicant is so situated that the disposition of the action may as a practical matter impair or impede the applicant's ability to protect that interest." Because Antonow & Fink has a claim to the specific proceeds over which this Court has assumed jurisdiction, the requirements of Rule 24 are satisfied. Antonow & Fink's motion to intervene is therefore granted.
VI. SBA'S MOTION FOR SUMMARY JUDGMENT
The SBA guaranteed two of the bonds at issue in this case to the extent of 80 percent and the third bond to the extent of 90 percent. In its motion for summary judgment, which is directed solely toward the Superintendent and not to Antonow & Fink, the SBA contends that it is now entitled to recover pro rata the salvage recovered by AFFI on each bond. In support of this contention, the SBA relies initially on the terms of paragraph 9 of the standard Surety Bond Guarantee Agreements which it entered into with AFFI:
If any net amount (less deductible) is recovered by Surety from any other source after payment has been made [to the surety] by SBA, SBA is entitled to receive up to 90 percent of said net amount within 90 days of actual receipt by the Surety.
The Superintendent, relying on the language of this provision, contends that the SBA's rights in the proceeds do not vest until the Superintendent has received the proceeds. The SBA, in order to prevail, must show that despite the language of the agreements, the SBA is entitled to the proceeds before they have been collected by the surety.
In support of this position, the government relies on Pearlman v. Reliance Insurance Co., 371 U.S. 132, 83 S. Ct. 232, 9 L. Ed. 2d 190 (1962). In Pearlman, a construction company had entered into a construction contract with the United States and had obtained surety bonds. The construction contract authorized the government to retain a portion of the monthly amounts due to the contractor until final completion and acceptance of the work. The contractor failed to complete the work, and the surety expended money to discharge debts of the contractor for labor and materials. The government turned over to the trustee of the contractor the amounts it had withheld pursuant to the contract. The surety then brought suit, claiming that those funds had vested in the surety and that the trustee had no right to them.
The Supreme Court agreed with the surety. The Court stressed that determination of the ownership of the funds was not governed by the priority rules of the Bankruptcy Act:
Ownership of property rights before bankruptcy is one thing; priority of distribution in bankruptcy of property that has passed unencumbered into a bankrupt's estate is quite another. Property interests in a fund not owned by a bankrupt at the time of adjudication, whether complete or partial, legal or equitable, mortgages, liens, or simple priority of rights, are of course not a part of the bankrupt's property and do not vest in the trustee. The Bankruptcy Act simply does not authorize a trustee to distribute other people's property among a bankrupt's creditors.