United States District Court, N.D. Illinois, Eastern Division
August 9, 2004.
MOUNTAIN FUNDING, INC., Plaintiff,
FRONTIER INSURANCE CO., Defendant.
The opinion of the court was delivered by: MORTON DENLOW, Magistrate Judge
MEMORANDUM OPINION AND ORDER
This case comes before this Court on a motion by Frontier
Insurance Co. ("Frontier" or "Defendant") to stay this proceeding
in favor of a New York state court insurance rehabilitation
proceeding that is adjudicating all claims including a claim
from Mountain Funding, Inc. ("Plaintiff") against Defendant.
See In the Matter of the Rehabilitation of Frontier Ins. Co.,
No. 1357/03 (N.Y. Sup. Ct. order dated May 10, 2004). For the
reasons set forth below, Defendant's motion to stay is granted.
I. BACKGROUND FACTS
The facts of this case have been recited in great detail in
Judge Ronald A. Guzman's opinion in Mountain Funding, Inc. v.
Frontier Insurance Co., No. 01 C 2785, 2003 U.S. Dist. LEXIS
11274 (N.D. Ill. June 30, 2003). Therefore, what follows are the
facts materially pertinent to a decision on Defendant's motion to
stay proceedings, which is now before the Court. A. PROCEEDINGS BEFORE JUDGE GUZMAN
On November 29, 2000, Plaintiff filed this lawsuit in the
Superior Court of New Jersey as a result of Defendant's alleged
failure to pay on a surety bond issued by Defendant. Defendant
then removed this case to federal district court in New Jersey.
Subsequently, the case was transferred to the Northern District
of Illinois and assigned to Judge Guzman.
On August 25, 2001, the Superintendent of Insurance for the
State of New York filed a rehabilitation proceeding against
Defendant in the Supreme Court of New York. In the Matter of the
Application of Gregory V. Serio, No. 405090/01 (N.Y. Sup. Ct.
order dated Oct. 10, 2001). The New York rehabilitation court
entered an order enjoining and restraining any person from
commencing or prosecuting lawsuits or proceedings against
Defendant for 180 days. Pursuant to that order, Defendant moved
Judge Guzman to stay these proceedings, which he did on November
13, 2001. Six months later, Judge Guzman accepted briefs and
heard oral arguments on the issue of continuing the stay
indefinitely, which he declined to do; on May 15, 2002, Judge
Guzman lifted the Stay of Proceedings and permitted discovery to
Defendant then filed a motion to reconsider the May 15, 2002
order lifting the Stay of Proceedings. Defendant argued that the
district court should abstain from this action because New York's
rehabilitation court is the proper court to handle Plaintiff's
underlying surety bond dispute because the court stands in a
"special relationship" with the facts and issues involved in the
case. However, on June 30, 2003, Judge Guzman denied the motion to reconsider. Mountain Funding, Inc., No. 01 C 2785, 2003 U.S.
Dist. LEXIS 11274, at *15 (N.D. Ill. June 30, 2003). Judge Guzman
explained that abstention is the exception to the norm in federal
court and that Defendant failed to establish that the New York
rehabilitation court stands in a "special relationship" with the
facts and issues involved in this case. Id. at *14. Judge
Guzman further noted that "there is an absence of information
concerning the nature of the [New York rehabilitation]
proceedings, what types of claims are being litigated, and a
schedule for the completion of rehabilitation." Id. The parties
then consented to have this case tried before this Court pursuant
to 28 U.S.C. § 636(c)(1). The case then proceeded to the verge of
trial before Defendant brought this motion for a stay, claiming
that the concerns raised by Judge Guzman now have been addressed
and resolved by an order entered by the New York rehabilitation
B. NEW YORK REHABILITATION PROCEEDINGS
On May 10, 2004, the New York rehabilitation court entered a
formal order approving an interim procedure for judicial review
of the rehabilitation proceedings for adjudication of claims. In
the Matter of the Rehabilitation of Frontier Ins. Co., No.
1357/03 (N.Y. Sup. Ct. order dated May 10, 2004). The purpose of
the rehabilitation proceedings is to facilitate judicial review
of Frontier's claimants, to expedite the resolution of such
claims, to prevent the unnecessary expenditure of assets, and to
provide a fair, equitable, and unified procedure for all
claimants of Frontier. See Def. Mot. to Stay, Ex. B1, at 6.
"The procedure will enable the Rehabilitator to dispose of surety
claims, which would not be covered by the majority of Guaranty Associations, and other claims as the Court deems
appropriate . . . while offering due process to all claimants who
object to his recommendations." Def. Mot. to Stay, Ex. B2, at 2.
The rehabilitator will examine each claimant's claim and make a
determination regarding that claim, which will act as a
recommendation to the claimant. Id. The rehabilitator then must
serve the claimant a "Notice of Determination" for each claim,
which advises the claimant of the recommendation amount. Id.
The claimant may object to the amount by serving a written
objection upon the rehabilitator within sixty days. Id. The
rehabilitator must contact the claimant and attempt to resolve
any objection. Id. at 3. In the event the objection is not
resolved, the matter is referred to a court-appointed referee who
hears the claimant's objection and reports on its validity. Id.
Upon the issuance of the referee's report, either the claimant or
the rehabilitator may petition the court for an order confirming
the report. Id. In the event that no objection is received, the
rehabilitator shall make an ex parte motion no earlier than
seventy-five days after the date of the Notice of Determination
for an order approving and confirming the adjudications of the
As a result of the new information detailed in the May 10, 2004
order, Defendant filed the present Motion to Stay Proceedings
under the principles of abstention, arguing that this Court now
has enough information to conclude that the New York
rehabilitation court is in a special relationship of technical
oversight or concentrated review of Plaintiff's claims. II. LEGAL STANDARD
Abstention principles can be raised and revisited at any time
during a proceeding. Prop. & Cas. Ins. Ltd. v. Cent. Nat'l Ins.
Co. of Omaha, 936 F.2d 319, 321 (7th Cir. 1991). There are three
accepted abstention doctrines that can be applied depending on
the underlying facts of the federal case at issue. See Colorado
River Conservation Dist. v. United States, 424 U.S. 800 (1976);
Younger v. Harris, 401 U.S. 37 (1971); Burford v. Sun Oil
Co., 319 U.S. 315 (1943). The principles espoused by the United
States Supreme Court in Burford v. Sun Oil provide the
analytical framework within which to decide whether abstention in
favor of the state rehabilitation proceedings is appropriate in
In Burford, the Supreme Court determined that a federal
court's abstention is appropriate when judicial review in the
designated state forum is "expeditious and adequate," in order to
avoid review in the federal courts that could cause "delay,
misunderstanding of local law and federal conflict with state
policy." 319 U.S. at 327-34. Additionally, the Supreme Court held
that federal courts could give rise to "intolerable confusion"
that a specialized state forum seeks to avoid. Id.
Subsequently, the Seventh Circuit has interpreted Burford to
hold that abstention is appropriate in two circumstances. Prop.
& Cas. Ins. Ltd., 936 F.2d at 322. First, 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." Id. Second, courts should
abstain from deciding cases where the review would be "disruptive of state efforts to establish a coherent policy with respect to a
matter of substantial public concern." Id.
In this case, the Court first must determine if either of the
two Burford circumstances are present. It is clear that there
is no "difficult question of state law" present, as this case
involves a surety bond dispute to which well-established legal
principles apply. Consequently, the first Burford circumstance
is not present. However, the second Burford circumstance is
present. State insurance rehabilitation proceedings are important
state efforts and are of great public concern. See generally
Prop. & Cas. Ins. Ltd., 936 F.2d at 319; Hartford Cas. Ins. Co.
v. Borg-Warner Corp., 913 F.2d 419 (7th Cir. 1990). Pursuant to
the McCarran-Ferguson Act, 15 U.S.C. §§ 1011-1015, states have a
great interest in maintaining a uniform insurance rehabilitation
process and have assumed primary responsibility for regulating
the insurance industry. Hartford, 913 F.2d at 426. As a result,
the New York rehabilitation process is a "matter of substantial
public concern" and therefore abstention may be appropriate in
this case. See Prop. & Cas. Ins. Ltd., 936 F.2d at 322.
This abstention inquiry arises because federal court review may
disrupt a New York State's efforts to establish a coherent public
policy. Therefore, two essential elements are necessary for this
Court to abstain. Prop. & Cas. Ins. Ltd., 936 F.2d at 323.
First, the state must offer some forum in which claims may be
litigated. Id. Second, that forum must be "special it must
stand in a special relationship of technical oversight or
concentrated review to the evaluation of those claims." Id. There is no dispute
that New York has provided a state forum in which Plaintiff's
claims may be litigated. As a result, the issue in this case is
whether the New York rehabilitation proceeding has a special
relationship of technical oversight or concentrated review to
evaluate Plaintiff's claims.
The Seventh Circuit addressed this issue in the factually
similar case, Property & Casualty Insurance, Ltd. v. Central
National Insurance Co. of Omaha, 936 F.2d 319 (7th Cir. 1991).
In that case, Property & Casualty Insurance, Ltd. ("PCIL") filed
a complaint against Central National Insurance Co. ("Central
National") because of a contract dispute regarding a reinsurance
agreement. Id. at 320. The parties had conducted significant
amounts of discovery and had filed cross-motions for summary
judgment when Nebraska's director of insurance placed Central
National into rehabilitation. Id. The Nebraska rehabilitator
petitioned the district court to either stay or dismiss the
district court case, and the district court held that the
principles announced in Burford required abstention. Id. PCIL
appealed. Id. at 320.
On appeal, the Seventh Circuit could not determine if the
rehabilitator commenced the type of proceeding that warranted
abstention under Burford. Id. There was no indication that the
rehabilitator attempted to commence a proceeding in any special
relationship of technical oversight or concentrated review to the
evaluation of creditor claims against Central National. Id. The
Seventh Circuit then investigated the possible types of
rehabilitation proceedings available to Central National and
found that there were three possible types of rehabilitation proceedings available, noting three examples to
help determine what types of rehabilitation proceedings warranted
[The rehabilitation of Insurer] A may involve nothing
more than a change in management. The rehabilitation
of Insurer B may involve nothing more than a merger
with another insurer to take advantage of needed
economies of scale. The rehabilitation of Insurer C
may involve, by itself or in combination with some
other response, a specialized claims proceeding for
the purpose of centrally and uniformly resolving the
claims of Central National's creditors. All of these
actions are classified as `rehabilitation
proceedings,' yet not all of them involve a
specialized proceeding; only the rehabilitation of
Insurer C implicates Burford.
Id. at 320, 324. The Seventh Circuit held that the record
contained no plan of rehabilitation and that the rehabilitator
openly expressed uncertainty as to how Central National's
rehabilitation would progress. Id. at 325. The court further
noted that the rehabilitator may be gathering Central National's
creditors in one forum to litigate their claims with uniformity,
but there was no such evidence contained on that record. Id. at
326. As a result, the Seventh Circuit remanded the case to the
district court to determine if the Nebraska forum involved the
type of specialized proceeding that warranted abstention. Id.
On June 30, 2003, Judge Guzman shared the same concerns as the
Seventh Circuit when he denied Defendant's motion to reconsider
the May 15, 2002 order lifting the stay of proceedings in this
case. He lacked sufficient information to determine whether the
New York rehabilitation proceedings were in a special
relationship of technical oversight or concentrated review that
would warrant abstention under Burford. However, with the new information set forth in the May 10, 2004 New York Supreme Court
order regarding the rehabilitation court, this Court now knows
exactly what type of rehabilitation proceedings the New York
court employs and is in a better position to determine if those
proceedings are in a special relationship of technical oversight
or concentrated review.
After a review of the New York rehabilitation proceedings, it
is clear that those proceedings are identical to the
rehabilitation of "Insurer C" in Property & Casualty Insurance
Ltd. and therefore satisfies the Burford requirements. The New
York rehabilitation proceedings clearly are in a special
relationship of concentrated review of Plaintiff's surety bond
claim, as their purpose is to facilitate judicial review of all
of Frontier's claimants, to expedite the resolution of such
claims, to prevent the unnecessary expenditure of assets, and to
provide a fair, equitable and unified procedure for all claimants
of Frontier. See Def. Mot. to Stay, Ex. B1.
It is important to note also that the New York rehabilitation
court is adjudicating thousands of claims made against Defendant,
many of which are similar to Plaintiff's surety bond claims
alleged in this lawsuit. At the inception of the New York
rehabilitation proceedings, Defendant's records showed more than
12,000 open unresolved claims, with estimated indemnity loses of
more than $475 million and estimated loss adjustment expenses of
more than $60 million. See id. Furthermore, "open surety claim
counts at the inception of the proceeding were approximately
2,400 with estimated surety indemnity and loss adjustment
reserves of approximately $55 million." Id. This detailed and
uniformed proceeding is exactly what the Seventh Circuit in Property &
Casualty Insurance Ltd. found would satisfy the Burford
Additionally, this case invokes important policy considerations
that support abstention. As noted in Hartford Casualty Insurance
Co. v. Borg-Warner Corp., 913 F.2d at 426, the importance of
state policies at issue go far beyond the present litigation.
Mountain Funding should not be able to jump ahead of Frontier's
other creditors because this litigation is outside the New York
rehabilitation proceeding and must not be able to set a precedent
for other claimants to do the same. Additionally, both this Court
and the New York rehabilitation proceeding are faced with the
same surety bond dispute. The possibility of inconsistent
decisions between this Court and the New York rehabilitation
proceeding could lead to confusion. Furthermore, allowing this
case to proceed would lead to a system where the state of New
York would not control the ultimate distribution to Frontier's
creditors. Id. This type of federal usurpation would be
inconsistent with the McCarren-Ferguson Act and general notions
of comity. Id.
Additionally, Frontier has been defending similar litigation in
the Northern District of Illinois in Mallon v. Frontier
Insurance Co., case number 01 C 2556. After New York's May 10,
2004 order, Frontier filed a Motion to Stay Proceedings in the
Mallon case. On July 16, 2004, Judge Harry D. Leinenweber
stayed the proceedings because the procedure outlined by the
Supreme Court of New York comported with the abstention
requirements as set out in Burford v. Sun Oil Co., 319 U.S. 315
(1943), and Property & Casualty Insurance Ltd. v. Central National Insurance Co. of Omaha, 936 F.2d 319
(7th Cir. 1991). Mallon v. Frontier Insurance Co., No. 01 C
2556 (N.D. Ill. minute order dated July 16, 2004).
For the above stated reasons, Defendant's Motion to Stay
Proceedings is granted.
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