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REWERTS v. RELIANCE INSURANCE COMPANY
November 13, 2001
ROBERT REWERTS, SR., D/B/A F & W LAWN CARE AND LANDSCAPING, AND WESTFIELD INSURANCE COMPANY, AS SUBROGEE OF F & W LAWN CARE AND LANDSCAPING, PLAINTIFFS
RELIANCE INSURANCE COMPANY, DEFENDANTS.
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).
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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