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Edgewater Beach Apartments Corp. v. Frontier Insurance Co.

March 19, 2009


The opinion of the court was delivered by: Judge Joan B. Gottschall


Plaintiff Edgewater Beach Apartments Corporation ("EBAC"), an Illinois entity, has brought suit against Defendant Frontier Insurance Company ("FIC"), a New York entity, alleging that FIC breached a performance bond and payment bond by refusing to perform on these bonds. Jurisdiction is based on diversity. FIC has moved for a stay pursuant to Burford v. Sun Oil Co., 319 U.S. 315 (1943) (colloquially referred to as "Burford abstention"), or for the complaint to be dismissed pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. BACKGROUND*fn1

EBAC is a residential cooperative owned and operated by its tenants, whose sole business is the ownership and operation of an apartment building. FIC is an insurance company based in New York, who was authorized to enter into insurance contracts within the state of Illinois when the bonds at issue were executed.

EBAC entered into a contract with third party Mid/America Contracting, Inc. ("Mid/America"), to repair the apartment building. To ensure completion of the contracted-for work, EBAC required Mid/America to obtain a performance bond, which was to be payable to EBAC in the event that Mid/America failed to fully perform. A bond was obtained from FIC in 1999. EBAC also required Mid/America to obtain a payment bond to cover expenses that would be due to Mid/America's subcontractors, so that EBAC could avoid mechanics' liens on the property in the event Mid/America failed to pay the subcontractors. A payment bond was obtained from FIC in 1999.

Mid/America breached. On February 14, 2006, EBAC notified FIC of the breach. EBAC attempted to work with FIC to have the claims processed in a timely manner, but was unable to secure performance from FIC, or, for that matter, an explanation as to why FIC would not perform. EBAC completed the work using other entities, but now seeks to be reimbursed for all expenses that resulted from Mid/America's breach, pursuant to both the performance bond and payment bond.*fn2 EBAC also seeks relief under 215 Ill. Comp. Stat. 5/155, which authorizes fees and statutory penalties against insurance companies who unreasonably delay in settling claims.

In 2001, FIC was placed into rehabilitation via a court order from the Supreme Court of the State of New York (the "Rehabilitation Court"). The court order was sought by the New York Superintendent of Insurance, and named the Superintendent as the Rehabilitator for FIC. The Rehabilitation Court purported to enjoin any action against FIC in any other court. EBAC was not and is not a party to that action. Notwithstanding the above, FIC has continued to be involved in litigation in other courts.

The Rehabilitation Court entered a subsequent order on May 10, 2004, which established a procedure for claimants of FIC to follow ("Rehabilitation Procedure"). This procedure provides that claims should be submitted to the Rehabilitator, who will examine each claim and make a recommendation of allowance, disallowance, or modification of the claim. After doing so, the Rehabilitator will send the claimant a "Notice of Determination" ("NOD") letter advising of the Rehabilitator's recommendation. If the claimant wishes to object, she must do so within 60 days in writing. The Rehabilitator will then attempt to resolve the objection with the claimant. Any objections that are not resolved will be referred to a referee appointed by the Rehabilitation Court. The referee will conduct a hearing and make a determination on the original recommendation and objection, after which either the claimant or the Rehabilitator can seek a court-order confirming the referee's report. The Rehabilitation Procedure also permits the Rehabilitator, "in his sole discretion, to settle claims at any time during the adjudication process." The Rehabilitation Procedure does not disclose how any approved determination of payment will actually be paid. Nor does it disclose how the determinations by the Rehabilitator or referee will be reviewed by the Rehabilitation Court. Notwithstanding this Rehabilitation Procedure, FIC has continued to settle claims outside of this stated procedure.

In its motion, FIC points to the Rehabilitation Procedure and insists that this is the only forum in which EBAC should be permitted to pursue its claim, pursuant to Burford abstention. FIC separately argues that EBAC's claims are precluded by the performance and payment bonds' contractual statute of limitations, which is two years. FIC finally argues that EBAC's state-law claim under § 155 must be dismissed because FIC was not the actor who engaged in the allegedly improper conduct-FIC asserts that any such claim is actionable only against the Rehabilitator if it is actionable against anybody.


I. Burford Abstention

The Supreme Court has "often acknowledged that federal courts have a strict duty to exercise the jurisdiction that is conferred upon them by Congress." Quackenbush v. Allstate Ins. Co., 517 U.S. 706, 716 (1996) (citations omitted). There is no doubt that this court has jurisdiction over the present action-this action is properly based on diversity under 28 U.S.C. § 1332. Nevertheless, "This [strict] duty [to exercise jurisdiction] is not . . . absolute." Id. (citations omitted). As the Quackenbush court goes on to explain, there are several narrow exceptions where a federal court may have jurisdiction but nevertheless choose to abstain from exercising that jurisdiction. Id. at 716--17. The abstention principle raised by FIC, and discussed in detail in Quackenbush, is Burford abstention.

Burford was a case in equity, involving "a complex state administrative scheme and the need for centralized decisionmaking in the allocation of oil drilling rights." Int'l College of Surgeons v. City of Chi., 153 F.3d 356, 361 (7th Cir. 1998) (hereinafter "Int'l College") (examining Burford doctrine). In Burford, the Court held that a case brought in federal court should have been dismissed*fn3 because the issue of allocation of oil drilling rights should have been resolved by a state-appointed commission that was designed for this specific purpose. See id. The Court emphasized that novel and very specific state-law issues were involved, that the legal question (how to divide up oil rights to various rigs drilling into the same reserve) was complex, and that the issue was predominantly a local interest specific to Texas, without any broader concern. Int'l College, 153 F.3d at 361; Burford, 319 U.S. at 331. The Court finally stressed that de novo review was available in a "designated state court," and that this review "was 'expeditious and adequate,' whereas review in the relatively unsophisticated federal courts would lead to '[d]elay, misunderstanding of local law, and needless federal conflict with the state policy.'" Int'l College, 153 F.3d at 361 (quoting Burford, 319 U.S. at 327, 334).

Burford abstention is possible in either of two contexts. "First, federal 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 case then at bar." Id. at 362 (quoting Quackenbush, 517 U.S. at 726--27). Second, courts "should also abstain from the exercise of federal review that 'would be disruptive of state efforts to establish a coherent policy with respect to a matter of substantial public concern.'" Id. FIC argues that the second form of abstention should control this case.*fn4

The Seventh Circuit has assumed in at least some circumstances that a state's rehabilitation proceedings in the matter of an insurance company could warrant abstention. See Property & Cas. Ins. Ltd. v. Central Nat'l Ins. Co. of Omaha, 936 F.2d 319, 323 (7th Cir. 1991) (hereinafter "Central Nat'l") (finding Burford abstention inappropriate because nature of Nebraska's rehabilitation proceeding was not clear from the record); Hartford Cas. Ins. Co. v. Borg-Warner Corp., 913 F.2d 419, 425--27 (7th Cir. 1990) (hereinafter "Hartford") (finding Burford abstention appropriate where Illinois had implemented a state-court rehabilitation proceeding). Neither of these cases ...

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