Sevigny v . Wausau CV-03-501-JM 09/07/04 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE
Roger A . Sevigny, Insurance Commissioner as Liquidator of the Home Insurance Company
v. Civil N o . 03-501-JM Opinion N o . 2004 DNH 131 Employers Insurance of Wausau a Mutual Company
O R D E R
Before the Court for consideration is the motion for remand
filed by Plaintiff Roger A . Sevigny, Insurance Commissioner of
the State of New Hampshire acting as Liquidator for the Home
Insurance Company (hereinafter “the Commissioner”). Defendant
Employers Insurance of Wausau (“Wausau”) filed an objection. For
the reasons set forth below, the Court grants the motion.
Standard of Review
Wausau removed this action, originally filed in Merrimack
County Superior Court (“Superior Court”), to federal court
asserting that this court has jurisdiction over this action under
28 U.S.C. § 1441. “[T]he right of removal being statutory, a
suit commenced in a state court must remain there until cause is
shown for its transfer under some act of Congress.” Sirois v . Bus. Express, Inc., 906 F. Supp. 7 2 2 , 725 (D.N.H. 1995) (quoting
Great N . Ry. C o . v . Alexander, 246 U.S. 276, 280 (1918)).
Therefore, to defeat a motion for remand, the party that removed
the action must demonstrate that the asserted basis for removal
satisfies statutory prerequisites. Id. at 725; see also Kingsley
v . Lania, 221 F. Supp. 2d 9 3 , 95 (D. Mass. 2002) (upon a motion
for remand, the removing party has the burden to show that the
court has subject matter jurisdiction, that removal was timely,
and that removal was proper). In deciding a motion for remand,
the court may pierce the pleadings and consider summary-judgment
type evidence such as pleadings, affidavits and deposition
transcripts. Duffin v . Honeywell Int’l, Inc., 312 F. Supp. 2d
869, 871 (N.D. Miss. 2004) (citing Hart v . Bayer Corp., 199 F.3d
239, 246-47 (5th Cir. 2000)).
The Commissioner does not contend that the federal court
lacks subject matter jurisdiction or that there has been a defect
in the removal procedure. See 28 U.S.C. § 1447(c) (statutory
grounds for a motion for remand). Rather, the Commissioner urges
the court to decline to exercise its jurisdiction under the
abstention doctrines discussed in Burford v . Sun Oil Co., 319
U.S. 315 (1943), and its progeny, and Colorado River Water
2 Conservation Dist. v . United States, 424 U.S. 800 (1976).
In considering the circumstances in which it would be
appropriate for federal courts to abstain, the Supreme Court has
found 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).
Nevertheless, that duty is not absolute. Id. at 716. Federal
courts may decline to exercise jurisdiction in exceptional
circumstances where denying a federal forum would clearly serve
an important countervailing interest. Id. The court’s authority
to abstain “extends to all cases in which the court has
discretion to grant or deny relief.” Id. at 718.
The Burford and Colorado River abstention doctrines,
asserted by the Commissioner here, have different rationales.
In New Orleans Public Serv., Inc. v . Council of New Orleans
(“NOPSI”), 491 U.S. 3 5 0 , 360-364 (1989), the Supreme Court
summarized the Burford doctrine as follows:
Where timely and adequate state-court review is available, a federal court sitting in equity must decline to interfere with the proceedings or orders of state administrative agencies: (1) when there are “difficult questions of state law bearing on policy problems of substantial public import whose importance transcends the result in the case then at bar”; or (2) where the “exercise of federal review of the question
3 in the case and in similar cases would be disruptive of state efforts to establish a coherent policy with respect to a matter of substantial public concern.”
Id. at 361 (quoting Colorado River, 424 U.S. at 8 1 4 ) .
There is no “formulaic test” for determining when dismissal
under the Burford doctrine is appropriate. Quackenbush, 517 U.S.
at 727. The court’s decision is based on a balancing of “the
strong federal interest in having certain classes of cases, and
certain federal rights, adjudicated in federal court, against the
State’s interests in maintaining “uniformity in the treatment of
an ‘essentially local problem.’” Id. at 728. The Supreme Court
has found that this balance only rarely favors abstention. Id.
Distinct from the principles of the Burford doctrine, the
Supreme Court found in Colorado River that a federal court may
abstain from hearing a matter when there is a concurrent state
proceeding based on considerations of “[w]ise judicial
administration, giving regard to conservation of judicial
resources and comprehensive disposition of litigation.” 424 U.S.
at 817. Such abstentions must be considered exceptional. Id. at
818. The First Circuit has identified six factors that ought to
be considered in determining whether Colorado River abstention
applies based on the Supreme Court’s decisions in Colorado River
4 and Moses H . Cone Mem’l Hosp. v . Mercury Constr. Corp., 460 U.S.
1 (1983):
(1) whether either court has assumed jurisdiction over a res; (2) the inconvenience of the federal forum; (3) the desirability of avoiding piecemeal litigation; (4) the order in which the forums obtained jurisdiction; (5) whether federal law or state law controls; and (6) whether the state forum will adequately protect the interests of the parties.
Currie v . Group Ins. Comm’n, 290 F.3d 1 , 10 (1st Cir. 2002).
This non-exhaustive list is to be used as a discretionary tool,
not a litmus test. Id.; see also Colorado River, 424 U.S. at
818-819 (“No one factor is necessarily determinative; a carefully
considered judgment taking into account both the obligation to
exercise jurisdiction and the combination of factors counselling
against that exercise is required.”).
The Court next sets forth the background of this action in
light of the standards for Burford and Colorado River abstention.
Background
By order dated June 1 3 , 2003, the Superior Court found that
The Home Insurance Company (“The Home”) was insolvent and ordered
that The Home be liquidated. Order of Liquidation, ¶ ( b ) ,
attached as Exhibit A to Pl.’s Mot. for Remand. The Commissioner
was appointed Liquidator of The Home. Id. The Order of
5 Liquidation further provides in relevant part that:
To the full extent of the jurisdiction of the Court and the comity to which orders of the Court are entitled, all persons are hereby permanently enjoined and restrained from any of the following actions:
(7) the setoff of any debt owing to The Home; provided, however, that notwithstanding anything in this Order to the contrary, nothing herein is intended nor shall it be deemed to stay any right of setoff of mutual debts or mutual credits by reinsurers as provided in and in accordance with RSA 402-C:34;1
Order of Liquidation, ¶ (n)(7).
In October 2003, the Commissioner commenced the instant
action in the Superior Court by filing a complaint requesting a
declaratory judgment. See Petition for Removal and attached
complaint (document n o . 1 ) . The Commissioner alleges in the
complaint that Wausau contends that it is entitled to offset
balances owed to The Home under reinsurance agreements against
balances allegedly owed to Wausau under reinsurance agreements
with U.S. International Reinsurance Company (“USI R e ” ) . Compl.,
¶ 1 6 . The Commissioner alleges that USI Re is an entity
1 N.H. Rev. Stat. Ann. (“RSA”) 402-C:34 provides that setoffs are permitted in connection with any action or proceeding under New Hampshire’s Insurers Rehabilitation and Liquidation Act, RSA 402-C:1 e t . seq., but only with regard to mutual debts or mutual credits between the insurer and another person and subject to challenge under specified exceptions.
6 “incorporated under the laws of New Hampshire and is the subject
of a Liquidation proceeding that is separate and distinct from
the Home Liquidation proceeding.” Compl., ¶ 7 . The Commissioner
claims that the offsets that Wausau seeks to make are not mutual,
and therefore are contrary to RSA 402-C:34 and the Superior
Court’s Order of Liquidation. Compl., ¶ 1 6 . The Commissioner
requests a declaratory judgment that no mutuality exists between
The Home and USI Re reinsurance agreements, and that Wausau is
not entitled to setoff debts owed to The Home against debts
allegedly owed to Wausau by USI R e . Prior to filing a responsive
pleading, Wausau removed the action to federal court on the basis
of diversity and federal question jurisdiction.
The Commissioner argues that remand is appropriate under the
Burford and Colorado River abstention doctrines because this
action arises as an integral part of the state’s liquidation
proceedings against an insolvent insurance company. He further
argues that since Wausau seeks to make a setoff that is not
founded on mutuality, Wausau is subject to the stay imposed by
the Superior Court’s liquidation order and must go to that court
for relief.
In its objection, Wausau responds that, as the Commissioner
7 acknowledges in the complaint, the purportedly non-mutual offsets
were the subject of a prior challenge by The Home that was
resolved in Wausau’s favor by binding arbitration several years
ago. See Compl., ¶ 9. According to Wausau, a threshold issue
presented in this case is whether the Commissioner is precluded
from relitigating the setoff issue. Wausau argues that such
issues are commonly decided by federal courts, implicate the
Federal Arbitration Act, and present no occasion for this Court
to apply the Burford or Colorado River abstention doctrine.
The Commissioner replies that Wausau’s objection
inappropriately focuses on the parties’ pre-insolvency relations.
The Commissioner contends that the commencement of the
liquidation proceeding against The Home invokes the application
of New Hampshire statutory law and the state court’s equitable
power to limit setoff rights in order to protect the rights of
creditors. Therefore, the Commissioner argues, the doctrine of
res judicata does not apply.
Discussion
I. The Court Has the Authority to Abstain
Based on the Court’s review of the Supreme Court’s decision
in Quackenbush, the Court finds that it has the authority to
8 abstain in this case. In Quackenbush, the Insurance Commissioner
for the State of California, as trustee for insolvent insurance
companies, brought an action against Allstate Insurance Company
in state court to recover reinsurance proceeds under common-law
tort and breach of contract theories. 517 U.S. at 709. After
Allstate removed the action to federal court, the district court
remanded the case to state court based on Burford abstention.
Id. The Court of Appeals for the Ninth Circuit vacated the
district court’s decision and ordered the case sent to
arbitration. Id. at 710.
On further appeal, the Supreme Court recognized that “in
cases where the relief being sought is equitable in nature or
otherwise discretionary, federal courts not only have the power
to stay the action based on abstention principles, but can also,
in otherwise appropriate circumstances, decline to exercise
jurisdiction altogether by either dismissing the suit or
remanding it to state court.” Id. at 721. Since the Insurance
Commissioner in Quackenbush sought tort and contract damages, the
Supreme Court affirmed the Ninth Circuit’s decision because the
relief sought in the district court was neither equitable nor
discretionary. Id. at 731.
9 The facts of the instant case are distinguishable from
Quackenbush because the relief sought by the Commissioner in this
action, declaratory judgment, is discretionary. See id. at 718-
719 (citing Wilton v . Seven Falls Co., 515 U.S. 2 7 7 , 282 (1995)
(federal courts have “discretion in determining whether and when
to entertain an action under the Declaratory Judgment Act, even
when the suit otherwise satisfies subject matter jurisdictional
prerequisites”)). Accordingly, the federal court has the power
to dismiss or remand this case if a recognized abstention
doctrine applies. Quackenbush, 517 U.S. at 731.
II. Abstention Under the Burford Doctrine
A. Timely and Adequate State Court Review
The first consideration for abstention under the Burford
doctrine is whether timely and adequate state-court review of
this matter is available. The provisions of New Hampshire’s
Insurers Rehabilitation and Liquidation Act (“the Act”) give the
Superior Court the power to decide all issues relating to the
disposition of an insolvent insurance company’s assets. RSA 402-
C:4 (III), ( I V ) . Wausau does not dispute The Home’s assertion
that its reinsurance recoverables are assets. Therefore, the
Superior Court’s jurisdiction extends to the determination of
10 Wausau’s right to make setoffs that limit The Home’s assets.
Wausau has not asserted any basis for a finding that it could not
receive timely and adequate review of its preclusion defense in
the Superior Court, and this Court is not aware of any.
Accordingly, the Court finds that timely and adequate state court
review of this action is available.
B. Proceedings or Orders of a State Administrative Agency
In New Hampshire, liquidations of insolvent insurers are
governed by the Act and implemented by the Superior Court.
Therefore, there is an issue of whether the Burford doctrine
applies to this case since it does not involve an order of or
proceedings before a state administrative agency. See Fragoso v .
Lopez, 991 F.3d 8 7 8 , 883 (1st Cir. 1993) (questioning whether
Burford abstention applies to an insolvent insurer being
liquidated under a state judicial structure rather than a state
administrative agency). Despite this apparent barrier, the
weight of the authority supports a finding that Burford
abstention may be applied in this context. See Quackenbush, 517
U.S. at 733 (“The fact that a state court rather than an agency
was chosen to implement California’s [regulatory scheme for the
insurance industry] provided more reason, not less, for the
11 federal court to stay its hand.”) (Kennedy, J., concurring);
Callon Petroleum C o . v . Frontier Ins. Co., 351 F.3d 2 0 4 , 209 (5th
Cir. 2003) (finding that federal courts normally manage the
conflict between their exercise of jurisdiction and state laws
establishing exclusive claim proceedings for insurance
insolvencies by abstaining under Burford); see also Feige v .
Sechrest, 90 F.3d 846 (3d Cir. 1996) (finding that a district
court appropriately stayed an action seeking money damages under
the Burford doctrine during the pendency of a state court
proceeding to liquidate an insurer). Accordingly, the Court
assumes that Burford abstention could be applied in this action
because New Hampshire has established a comprehensive regulatory
scheme for the liquidation of insolvent insurers under the Act.
C. Difficult Questions of State Law
The Court next considers whether the instant action presents
“difficult questions of state law bearing on policy problems of
substantial public import whose importance transcends the result
in the case then at bar.” The issue presented in the
Commissioner’s declaratory judgment action is whether Wausau’s
challenged setoffs may be considered “mutual” within the meaning
of RSA 402-C:34. The Commissioner argues that the New Hampshire
12 statute requires “traditional mutuality” for setoffs during the
pendency of a liquidation proceedings, which the Commissioner
alleges does not exist for the setoffs Wausau seeks to make. The
Commissioner has not cited any New Hampshire authorities in
support of his position. Additionally, the Commissioner argues
that the Superior Court has the equitable power in a liquidation
proceeding to limit setoff rights that might otherwise be
available in order to effect the purpose of the Act.2 Again, the
support of his position. The Court finds that these seemingly
unresolved issues present “difficult questions of state law
bearing on policy problems of substantial public import whose
importance transcends the result” in the instant case.
In opposing the Commissioner’s motion, Wausau argues that
the Burford doctrine should not be applied because the issue of
whether the prior arbitration awards in Wausau’s favor precludes
the Commissioner from asserting his non-mutuality claim does not
call for the exercise of equitable powers under state law or
implicate any paramount state interests. Wausau’s argument puts
2 RSA 402-C:1(IV) provides that: “The purpose of this chapter is the protection of the interests of insureds, creditors, and the public generally, with minimum interference with the normal prerogatives of proprietors,
13 the cart before the horse. Wausau may have a valid defense to
the Commissioner’s claim, but that does not mean that the
Commissioner’s claim ought not be heard by the state court in the
first instance where the Commissioner seeks a declaratory
judgment that involves an interpretation of a state insolvency
statute and the Superior Court’s equitable powers in a
liquidation proceeding.
Since the Court finds that Wausau has an opportunity for
timely and adequate review of its preclusion defense in the state
court, and that this action raises difficult questions of
substantial public import pertaining to the extent of setoff
rights in a liquidation proceeding, the Court finds that it would
be appropriate for the federal court to abstain in order for the
state court to determine in the first instance how RSA 402-C:34
and the Superior Court’s Order of Liquidation applies to these
facts.
III. Colorado River Abstention
The Commissioner also contends that Colorado River
abstention applies in this case. Colorado River abstention may
apply when there is concurrent state and federal litigation
involving essentially the same issues.
14 There is no doubt that there is a pending liquidation
proceeding in the state court pertaining to The Home. While the
Commissioner argues that the instant action arises as “an
integral part” of the liquidation proceedings, the action was
commenced by the Commissioner’s filing of a complaint, which
Wausau removed to federal court. Therefore, it does not appear,
as a technical matter, that this dispute is currently being
actively litigated in the state court. But the Commissioner is
expressly authorized under the Act to “[c]ollect all debts and
moneys due and claims belonging to the insurer,” RSA 402-C:25
( V I ) , and to institute actions in New Hampshire or elsewhere in
order to effect the purpose of the Act. See 402-C:25 ( V I ) ,
(XII), (XVII). Such actions are incidental to the liquidation
proceeding. Moreover, there is no question that the Superior
Court obtained jurisdiction over the liquidation of The Home
months before the instant action was commenced, and that the
Superior Court has jurisdiction over the instant dispute. And,
as discussed above, the Court finds that Wausau’s interests can
be adequately protected in the state forum. All of these factors
support the application of Colorado River abstention.
Most significantly, it appears that state law controls the
15 outcome of this dispute. The Commissioner contends that the New
Hampshire insolvency statute, and the state court’s equitable
powers in a liquidation proceeding, limit Wausau’s setoff rights.
In response, Wausau contends that federal law applies because it
argues that the prior arbitration awards in its favor are
governed by the Federal Arbitration Act (“FAA”). However, Wausau
does not address the application of the McCarran-Ferguson Act, 15
U.S.C. § 1011, et seq., to this action. Courts have held that a
party’s rights under the FAA are preempted by state laws
regulating the business of insurance pursuant to § 1012(b) of the
McCarran-Ferguson Act.3 See Munich Am. Reinsurance C o . v .
Crawford, 141 F.3d 585, 596 (5th Cir. 1998) (finding that state
laws regulating the business of insurance may suspend federal
remedies under the F A A ) ; Nat’l Home Ins. C o . v . King, 291 F.
Supp. 2d 5 1 8 , 528-531 (E.D. Ky. 2003) (finding that a Kentucky
statute providing that arbitration clauses in insurance contracts
were not enforceable was exempt from preemption by the FAA by
3 Section 1012(b) provides that:
No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, . . , unless such Act specifically relates to the business of insurance.
16 virtue of the McCarran-Ferguson A c t ) ; see also, Quackenbush, 517
U.S. at 733 (finding that the district court was reasonably
concerned about the threat posed to state proceedings by
different state and federal rulings on a then-unresolved issue of
setoff rights and citing the McCarran-Ferguson Act) (Kennedy J.,
concurring). Because the Commissioner’s claim is based on the
interpretation of state laws regulating the business of insurance
that are not preempted by the FAA, the Court finds that state law
issues predominate in the instant action.
Weighing the relevant considerations, the Court finds that
Colorado River abstention applies to this action. This Court
does not express any opinion regarding the effect of prior
arbitration awards in Wausau’s favor on the Commissioner’s
ability to challenge the propriety of Wausau’s setoffs in light
of The Home’s liquidation. Wausau is free to assert its
entitlement to continue taking setoffs in the Superior Court.
See Munich Am. Reinsurance, 141 F.3d at 596.
Conclusion
For the reasons set forth above, the Court finds that this
Court should abstain from hearing this matter based upon the
Burford and Colorado River abstention doctrines. Accordingly,
17 the motion for remand (document n o . 5 ) is granted. The Clerk of
Court is directed to remand this matter back to the Merrimack
County Superior Court.
SO ORDERED.
James R. Muirhead United States Magistrate Judge
Date: September 7 , 2004
cc: Peter C.L. Roth, Esq. Natasha C . Lisman, Esq. Doreen F. Connor, Esq.