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November 13, 2001


The opinion of the court was delivered by: John A. Gorman, United States Magistrate Judge.


In late 1996, Robert Rewerts and Westfield Insurance Company filed an action in McLean County, Illinois, for personal injuries arising out of a vehicular accident involving a semi-tractor trailer operated by Builder's Transport Inc. (BTI). BTI removed the case to this court. Eventually, judgment was entered against BTI and in favor of Rewerts in the amount of $247,966.48 and in favor of Westfield in the amount of $129,797.11. See, No. 97-1002. BTI was purportedly insured by Reliance Insurance Company. Reliance refused to indemnify BTI, raising various policy defenses in response to garnishment interrogatories. Rewerts and Westfield then filed this action, seeking a declaration of coverage.
Reliance in the meantime had been suffering financial difficulties. The Commissioner of Insurance of the Commonwealth of Pennsylvania filed a petition with the Commonwealth Court of Pennsylvania, asking that Reliance be placed into Rehabilitation in accordance with the Pennsylvania Insurance Department Act, 40 P.S. § 221.1-221.63. The court allowed the Petition, and entered a Rehabilitation Order dated May 29, 2001. The sixty (60) day stay authorized by that order was later extended by 180 days by Order of the Commonwealth Court on August 21, 2001. In the latter Order, the Commonwealth Court noted that there were over 190,000 claims and 15,000 lawsuits pending against Reliance and that one of the purposes of the stay was to "analyze pending litigation and outline a strategy to approach and resolve, in an orderly and fair manner, the competing issues and demands pending against Reliance." Koken v. Reliance Ins. Co., ___ A.2d ___, No. 269 M.D. 2001, 2001 WL 959318 (Pa. Commonwealth, Aug. 21, 2001).
Based on that Order, Reliance filed a motion with this court, seeking a stay pursuant to that Order. A hearing was held on that motion, at which time the court directed the parties to file briefs on abstention. However, on August 6, 2001, before this court had ruled, Reliance represented that the Rehabilitation Order had expired. The motion for stay was therefore denied.
Thereafter, Reliance advised this court that it had learned that the Rehabilitation Order had been extended by Order dated August 2, 2001. That Order included the following statement: "With respect to suits . . . in the federal courts of the United States, this Order constitutes the request of this Court for comity in the extension of the stay by such courts or tribunals, and that those courts afford this order deference by reason of this Court's responsibility for and supervisory authority over the rehabilitations of Reliance Insurance Company."

Plaintiff Westfield Insurance Company has dismissed its claims. However, Plaintiff Rewerts opposes a stay and wishes to proceed to judgment in this case, believing that without a judgment in this case he has no "claim" to present to the Rehabilitation Court in Pennsylvania.


As a general rule, state courts are completely without power to restrain federal in personam proceedings. Donovan v. Dallas, 377 U.S. 408, 412-13 (1964); General Atomic Co. v. Felter, 434 U.S. 12, 18-19 (1977). However, there are some circumstances in which federal courts abstain, recognizing that a matter is best resolved by the state courts. Because the McCarran-Ferguson Act, 15 U.S.C. § 1011-1015, reserves to the states the power to regulate insurance companies (insurance companies are exempt from the Bankruptcy Codes' coverage, 11 U.S.C. § 109), insurance insolvency is an issue that is resolved by state law. Where an action in federal court implicates an on-going insolvency proceeding, the issue of abstention quite naturally arises.
Although there are several forms of abstention, their underlying premises and analytical approach overlap each other significantly, and in turn the abstention doctrines are informed by principles of ripeness and mootness. See discussion in Hartford, 913 F.2d at 424-25. Despite the overlap, however, in Property & Casualty Ins. Ltd. v. Central Nat'l Ins. Co. of Omaha, 936 F.2d 319, 321 (7th Cir. 1991), the Court commented that Burford abstention, based on Burford v. Sun Oil, 319 U.S. 315 (1943), is the "doctrine of choice" in analyzing whether to abstain in favor of state insurance liquidation and rehabilitation. See also, Hartford Cas. Ins. Co. v. Borg-Warner Corp., 913 F.2d 419, 425 (7th Cir. 1990) (applying Burford abstention to a dispute arising in the insurance context); General Ry. Signal Co. v. Corcoran, 921 F.2d 700, 708 (7th Cir. 1991) (collecting cases). Nonetheless, because of the overlap between the doctrines of abstention, analysis under the Burford line of cases may borrow from other abstention analyses and may be guided by principles of ripeness and standing when appropriate. Property & Casualty, 936 F.2d at 321-22.
In Burford, the Texas legislature had created a complex administrative scheme for addressing the myriad of issues concerning local oil well drilling. Any order arising out of that mechanism could only be reviewed by a designated, specialized state court. In that way, confusion in the industry about standards and rules could be avoided. The plaintiff brought an action challenging four orders arising out of that context, claiming that they violated his Fourteenth Amendment rights. The Supreme Court determined that judicial review by the specialized state court was "expeditious and adequate," and that federal court review would result in "delay, misunderstanding of local law, and needless federal conflict with the state policy", 319 U.S. at 327, 333-34, all effects that the Texas scheme had sought to avoid.
Subsequent cases have articulated two instances, each stemming from one of the concerns of the Burford court, in which federal courts should abstain. First, the courts should abstain from deciding "difficult questions of state law bearing on policy problems of substantial public import whose importance transcends the result in the present case." Second, abstention is proper when the exercise of federal review "would be disruptive of state efforts to establish a coherent policy with respect to a matter of substantial public concern." Property & Casualty, 936 F.2d at 322.
In Hartford, a captive insurance company was placed in rehabilitation; an order issued from the state court enjoining all actions against the company and its directors, except for the claims that were filed in the rehabilitation proceeding. Hartford filed a claim in the rehabilitation proceeding to recover reinsurance obligations owed by the captive insurance company. The rehabilitation order was modified, allowing outside actions against the directors, officers or stockholders. Hartford then filed an action in federal court against the captive's parent and the parent's other subsidiaries (which were all stockholders) for their roles in the captive's demise. The Seventh Circuit found abstention proper because any liability of the stockholders depended on a determination of the liability of the captive insurance company itself, the very issue being decided in the rehabilitation proceeding. The State of Illinois' interest in developing a uniform insurance rehabilitation process was "paramount." Id. at 426.
In Property & Casualty, one insurance company filed a diversity action against another, seeking recovery of amounts allegedly due under a re-insurance contract. The defendant insurance company was in rehabilitation under the laws of Nebraska. Without first obtaining an order from the Insurance Director, the Rehabilitator moved to stay or dismiss the federal action on the grounds of rehabilitation, and the district court concluded that Burford required abstention.
On appeal, the Seventh Circuit reversed, finding first that there are "two essential elements" of Burford abstention. The state "must offer some forum in which claims may be litigated," and that forum must be "special, standing in a special relationship of technical oversight or concentrated review to the evaluation of those claims." Id. at 323. The specialized forum is a prerequisite to and not a factor in Burford abstention. Id. Under Nebraska law, no specialized forum was actually created. Instead, the Rehabilitator had the discretion to commence a specialized claims proceeding by "an affirmative effort." The Court was unable to determine from the record whether the Rehabilitator had taken such a step to commence the type of proceeding entitled to federal deference, and the Rehabilitator had not ...

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