United States District Court, Central District of Illinois
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).
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 obtained a court order directing
a stay of pending litigation. The case was remanded to the District
Court for a determination of the procedural facts necessary to properly
apply Burford abstention principles.
In an important footnote, the Property & Casualty Court emphasized that
Burford abstention requires a "very careful and fact-specific inquiry.
936 F.2d at 326 n. 13. This footnote seems to explain the distinction
between Hartford and Property & Casualty — the uncertainty of the
record in the latter case made it
impossible to undertake that detailed inquiry. What these two cases make
clear is that there is no hard and fast rule requiring abstention in all
cases in which a defendant insurer is in rehabilitation or liquidation
under state law.
In the case before the court, it is Pennsylvania's Insurance Code that
creates the framework for Burford analysis. That Code specifically
provides that it applies to insurers "against whom claims arising from
[insurance business done in Pennsylvania] may exist now or in the
future." 40 P.S. § 221.2(1). A "creditor" is defined as a person
"having any claim, whether matured or unmatured, liquidated or
unliquidated, secured or unsecured, absolute, fixed or contingent."
Under the Code, the Insurance Commissioner files a petition in the
of Pennsylvania, seeking rehabilitation or
liquidation of an insurer on one of the statutory grounds; in this case,
rehabilitation was sought. Once the petition is allowed, the
Commissioner conducts proceedings to determine the assets and liabilities
of the insurance company. Based on those proceedings, a recommendation
is issued to the court, which enters necessary orders. The Act
specifically allows the Commissioner, acting as Rehabilitator, to
"consider all litigation pending outside this Commonwealth and shall
petition the courts having jurisdiction over that litigation for stays
whenever necessary to protect the estate of the insurer." 40 P.S. §
221.17. This statutory scheme constitutes a comprehensive system to deal
with insurance rehabilitation and liquidation. See, Reliance Nat'l
Indemnity Co. v. Pinnacle Cas. Assur. Corp., No. 00D1577N, 2001 U.S.
Dist. LEXIS 10775 *6 (M.D.Ala. July 19, 2001); Maleski v. Conning and
Co., No. 94-7507, 1995 WL 570466 *4-5 (E.D.Pa. Sept. 27, 1995); Twin
City Bank v. Mut. Fire Marine & Inland Ins. Co., 646 F. Supp. 1139, 1142
The Hartford court described as "useful guidance" the four factors
explicated by the Tenth Circuit in determining whether a federal court
should exercise its jurisdiction in the context of the insurance
industry; those factors are:
First, is the suit based on a cause of action that is
exclusively federal? Second, does the suit require
the court to determine issues that are directly
relevant to state policy in the regulation of the
insurance industry? Third, do state procedures
indicate a desire to create special state forums to
regulate and adjudicate these issues? Fourth, are
difficult or unusual state laws at issue?
913 F.2d at 425, citing Grimes v. Crown Life Ins. Co., 857 F.2d 699
704-05 (10th Cir. 1988), cert. denied, 489 U.S. 1096
In the case presently before this court, the plaintiff's cause of
action is not exclusively federal. In fact, it is not federal at all
— it is simply an action in execution of a federal judgment that
requires declaration of coverage. This factor leans in favor of
abstention. See, e.g., Lac D'Amiante du Quebec v. American Home
Assurance Co., 864 F.2d 1033, 1044 (3d Cir. 1988) (court
may more readily abstain from a case that contains no issue of federal
With respect to the second factor, plaintiff asks this court to
determine whether the insurance policy issued by Reliance includes
coverage for the underlying judgment. Plaintiff argues first that,
unlike the plaintiff in Hartford, he has no claim to present to the
Pennsylvania tribunal until he has a judgment. That is simply not the
case. The Pennsylvania Insurance Code includes among creditors those who
have contingent claims, such as this one. There is no requirement in the
Code that contingent claims be reduced to judgment before being presented
to the Rehabilitator, and there is no impediment to plaintiff's filing a
claim in the Rehabilitation proceedings, just as the insurance company
did with its "claim" in Hartford.
Plaintiff next argues that a determination of coverage by this court is
not a question that bears on the type of significant policy problems
presented in Hartford but is more like the simple question presented in
Property & Casualty. I disagree. The Hartford court disdained the
plaintiff's efforts to limit the discussion to the relatively-small
interests of the immediate litigation, instead considering those
interests in the context of the wider, paramount interest of the state in
a uniform insurance rehabilitation process. 913 F.2d at 426.
Characterizing Hartford's suit as an attempt "to jump ahead" of the
defendant's other creditors, the court found that there would clearly be
an overlap between any federal judgment and decisions that would be made
in the rehabilitation proceedings. Id.
As in Hartford, an integral part of the Pennsylvania statutory scheme
is protection of the public and the policyholders from significant risks
that arise out of various financial or operational problems of insurance
companies. As evidence of Pennsylvania's interest in insurance
companies, all litigation arising out of rehabilitation and liquidation
occurs in the Commonwealth Court, the court that handles matters directly
involving the State itself. Under the statutory scheme, it is the State
that initiates rehabilitation proceedings, demonstrating the overriding
State interest in those proceedings. To allow courts across the country
in the 15,000 pending cases to decide issues that would impact the
finances of Reliance would not just undermine that State policy; it would
devastate it. It would invite inconsistent interpretations of coverage
and would, as in Hartford, allow some creditors to jump ahead of others
by obtaining extra-forum judgments. The result would be major disruption
of the rehabilitation proceedings, not to mention erosion of the State's
policy. The second factor weighs strongly in favor of abstention.
As does the third factor: do state procedures indicate a desire to
create special state forums to regulate and adjudicate these issues. The
state statute clearly anticipates a limited period of time for an insurer
to get its financial house in order, to rehabilitate itself under the
guidance of the Rehabilitator and the supervision of the Commonwealth
Court. If that is not timely done, the Rehabilitator petitions for
liquidation. All the substantive matters are heard and determined by the
Rehabilitator, with approval upon conclusion by the Court and with the
right of creditors to obtain a review of the Rehabilitator's
determination of particular claims in that same Court. As in Burford and
Hartford, this is an "expeditious and adequate" forum, and interference
with it by this court would result in "delay, misunderstanding of local
law, and needless federal conflict with the state policy."
Finally, as to the fourth factor, there appear to be no difficult
questions of state
law. This court resolves coverage issues on a relatively regular basis.
That single factor, however, does not outweigh the other three.
Plaintiff has not directed the court's attention to other principles that
might tip the balance toward a different conclusion. I therefore find
that this court should abstain in this case.
The Local Rules of this Court anticipate that a stay will be entered in
"court-ordered reorganization or liquidation which stays ongoing debt
collection proceedings." Local Rule CDIL 16.1(D). Accordingly, the
defendant's motion to stay these proceedings is allowed. The stay shall
remain effective for the balance of the 180 days, which is February 21,
2002, at which time the court will re-visit this matter at a telephone
status conference at 10:00 a.m. The court will place the call. In the
event that the Commonwealth Court or the Rehabilitator enter any relevant
orders before that date, the parties are directed to advise this court