421 F.3d 835 (9th Cir. 2005), 03-55548, Hawthorne Savings F.S.B. v. Reliance Ins. Co. of Illinois

Docket Nº:03-55548, 03-55611.
Citation:421 F.3d 835
Party Name:HAWTHORNE SAVINGS F.S.B.; Hawthorne Financial Corporation, Plaintiffs-Appellees, v. RELIANCE INSURANCE COMPANY OF ILLINOIS, Defendant-Appellant. Hawthorne Savings F.S.B.; Hawthorne Financial Corporation, Plaintiffs-Appellees, v. M. Diane Koken, Insurance Commissioner of the Commonwealth of Pennsylvania, in her capacity as Liquidator of Reliance Ins
Case Date:August 24, 2005
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit

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421 F.3d 835 (9th Cir. 2005)

HAWTHORNE SAVINGS F.S.B.; Hawthorne Financial Corporation, Plaintiffs-Appellees,



Hawthorne Savings F.S.B.; Hawthorne Financial Corporation, Plaintiffs-Appellees,


M. Diane Koken, Insurance Commissioner of the Commonwealth of Pennsylvania, in her capacity as Liquidator of Reliance Insurance Company, Intervenor-Appellant,

Reliance Insurance Company of Illinois, Defendant.

Nos. 03-55548, 03-55611.

United States Court of Appeals, Ninth Circuit

August 24, 2005

Argued and Submitted December 6, 2004—Pasadena, California.

As amended on Jan. 13, 2006.

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W. Wendell Hall and Rosemarie Kanusky, Fulbright & Jaworski L.L.P., San Antonio, Texas, Claudia Morehead and Robert S. Schulman, Fulbright & Jaworski L.L.P., Los Angeles, California, and Oscar Rey Rodriguez, Fulbright & Jaworski L.L.P., Dallas, Texas, for the defendant-appellant.

Pamela H. Woldow, Chief Counsel, Insurance Department, Commonwealth of Pennsylvania, Harrisburg, Pennsylvania, for the intervenor-appellant.

Jeffrey A. Tidus and David P. Crochetiere, Baute & Tidus LLP, Los Angeles, California, for the plaintiffs-appellees.

Appeal from the United States District Court for the Central District of California D.C. No.CV-99-13119- DT(AJW), Dickran M. Tevrizian, District Judge, Presiding.

Before: James R. Browning, Harry Pregerson, and Marsha S. Berzon, Circuit Judges.


BERZON, Circuit Judge:

"[F]ederal courts routinely confront the conflict between their exercise of federal jurisdiction and state laws establishing exclusive claims proceedings for insurance insolvencies." Callon Petroleum Co. v. Frontier Ins. Co., 351 F.3d 204, 209 (5th Cir. 2003).1 These appeals present such a conflict.

Hawthorne Savings, F.S.B. ("Hawthorne") sued the Reliance Insurance Company of Illinois ("Reliance-Illinois") in California state court, alleging various California state-law contract-based claims. Reliance-Illinois removed the suit to federal court on the basis of diversity. Shortly thereafter, Reliance2 was placed in rehabilitation proceedings, and later in liquidation proceedings, in the Commonwealth Court of Pennsylvania.3

The district court proceeded with this suit. The jury entered a verdict in Hawthorne's favor and awarded $950,000

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in damages. Reliance now appeals the final judgment. Reliance's principal argument is that the district court erred in continuing to exercise jurisdiction over Hawthorne's suit once the rehabilitation proceedings began, because (1) it lacked jurisdiction or (2) various abstention and comity-based doctrines required the court to stay its hand. In addition, Reliance challenges the district court's order requiring it to post a $1.1 million litigation bond, and contests one of the jury instructions used at trial. For the reasons that follow, we affirm on all claims in No. 03-55548 and dismiss No. 03-55611 for failure to prosecute.

I. Background

This case has its roots in one of the more infamous legal proceedings of the 1990s, the prosecution of O.J. Simpson. In 1995, Simpson, having incurred substantial litigation costs and fees as a result of his prosecution and facing further costs and fees for his civil trial, took out a loan from Hawthorne secured with mortgages on his Los Angeles-area residence ("Rockingham") and a townhouse in New York. During Simpson's civil trial in 1997, the Rockingham property went into default, leading to a widely publicized foreclosure sale. One potential bidder, Jeff Bazyler, contacted Hawthorne Savings to obtain funds for a bid on the property. Hawthorne's President, Scott Braly, personally approved a loan for $2.6 million in cash, charging substantial fees and interest.4

After the period in which Bazyler could have rescinded the loan without penalty passed, Braly decided to have Hawthorne bid against Bazyler at the foreclosure sale. Toward that end, Hawthorne sent Bazyler a letter informing him that it reserved the right to bid on the property. Braly also denied Bazyler's request for an additional $200,000, even though there was no doubt that Bazyler had the necessary collateral for the extra funds. Hawthorne outbid Bazyler at the foreclosure sale, purchasing the property for $2,631,000, almost $1.2 million under its market price. Hawthorne then sold the property for $3.7 million.

Bazyler subsequently filed suit against Hawthorne and Braly, alleging deceit, constructive fraud, and constructive trust, in violation of California Civil Code sections 1709, 1573, and 2224, respectively. Eventually, Hawthorne settled on its own behalf and Braly's, agreeing to pay Bazyler $700,000 from its own accounts.

Enter Reliance. Hawthorne was insured by a "Directors and Officers Liability" policy issued by Reliance-Illinois, which later merged into its parent, the Reliance Insurance Company ("Reliance"). The policy had applicable coverage limits of $10 million, with a "self-insured retention" of $100,000; Hawthorne had to incur legal expenses of at least that amount before the policy would kick in. Reliance was informed of the Bazyler action, and participated in some of the mediation sessions. Until the settlement, Reliance never indicated that it would refuse to pay on any claim arising out of the case. Yet, once the parties settled, Reliance, citing various provisions of California law pertaining to intentional misconduct, compensated Hawthorne for only $10,181.59 of the $364,559.53 in legal fees incurred. Adding together the $700,000 settlement and the fees Reliance refused to cover, Hawthorne was out of pocket for $1,054,377.94.

In late 1999, Hawthorne filed this lawsuit against Reliance in the California Superior Court for Los Angeles County, alleging

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breach of contract and breach of the implied covenant of good faith and fair dealing. The suit sought a declaratory judgment to the effect that Hawthorne's policy with Reliance obligated the insurer fully to defend Hawthorne and to pay all of Hawthorne's fees and expenses arising out of the Bazyler litigation. The complaint also asked for damages arising from the breach of contract and breach of the implied covenant of good faith and fair dealing.

Reliance removed the action to the U.S. District Court for the Central District of California under the diversity removal provision of 28 U.S.C. § 1441(b). In late 2000, the district court granted Reliance's motion for summary judgment as to Hawthorne's second claim. The first and third claims, however, proceeded to trial.

In advance of the trial, and in light of the deteriorating financial condition of the parent Reliance, into which Reliance-Illinois had by then merged, Hawthorne moved, in early 2001, for an order requiring a $1.1 million bond to secure payment of any judgment rendered in Hawthorne's favor. The district court granted the motion. Reliance thereupon posted an indemnity bond in which the Insurance Company of the State of Pennsylvania obligated itself to Hawthorne for no more than $1.1 million should Hawthorne prevail in its suit against Reliance.5

Shortly thereafter, M. Diane Koken, the Insurance Commissioner of the Commonwealth of Pennsylvania, commenced rehabilitation proceedings on behalf of Reliance's creditors in the Commonwealth Court. See Koken v. Reliance Ins. Co., 784 A.2d 209 (Pa. Commw. Ct. 2001) (per curiam). The petition for rehabilitation, which the Pennsylvania court granted on May 29, 2001, placed Reliance under Koken's regulatory supervision. See 40 Pa. Cons. Stat. § 221.15(c).

In light of the rehabilitation order issued by the Pennsylvania Commonwealth Court, Reliance moved to exonerate the bond. The district court denied the motion. The following day the Pennsylvania Commonwealth Court terminated the rehabilitation proceedings, declared Reliance insolvent, and granted Koken's petition to liquidate Reliance. Koken was appointed as the liquidator of Reliance's assets. See id. § 221.20(c). The Commonwealth Court's liquidation order provided, inter alia, that: "All actions, including arbitrations and mediations, currently pending against Reliance in the courts of the Commonwealth of Pennsylvania or elsewhere are hereby stayed."

While the liquidation proceedings were ongoing, Reliance moved to dismiss the Hawthorne lawsuit on the ground that the liquidation order vested the Pennsylvania Commonwealth Court with "exclusive" jurisdiction over claims against Reliance and enjoined any continued prosecution of claims against Reliance in other fora. The district court denied the motion to dismiss. Koken then sought leave to intervene for the limited purpose of contesting subject-matter jurisdiction. The district court denied the intervention motion as untimely.6

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Eventually, the case went to trial, culminating in January 2003 in a jury verdict for $950,000 in favor of Hawthorne. After the verdict, the district court granted Hawthorne's motion to enter judgment on its claim for declaratory relief and provided that an additional $343,018.36 in pre-judgment interest would be added to the jury verdict, for a total award to Hawthorne of $1,293,018.36 (not including post-judgment interest and costs). From this final order Reliance timely appeals.

II. The District Court's Exercise of Jurisdiction

Reliance's central contention is that the district court should not have continued to exercise jurisdiction over this suit once the Commonwealth Court commenced liquidation proceedings. Although we consider each of its jurisdictional and abstention arguments supporting this contention in turn, we begin with some preliminary observations:

This lawsuit is a simple state-law contract claim between private parties. Federal jurisdiction is grounded solely on the diversity of citizenship of the parties....

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