Ernst & Young v. Depositors Economic Protection Corp.

• Decision Date: 07 November 1994
• Docket Number: No. 94-1749,94-1749
• Citation: 45 F.3d 530
• Parties: ERNST & YOUNG, Plaintiff, Appellant, v. DEPOSITORS ECONOMIC PROTECTION CORPORATION, et al., Defendants, Appellees. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 530

45 F.3d 530

ERNST & YOUNG, Plaintiff, Appellant, v. DEPOSITORS ECONOMIC PROTECTION CORPORATION, et al Defendants, Appellees.

No. 94-1749.

United States Court of Appeals First Circuit.

Heard Nov. 7, 1994.

Decided Jan. 25, 1995.

Jerome G. Snider, with whom Daniel F. Kolb, Davis Polk & Wardwell, New York City, Peter J. McGinn, John E. Bulman, Tillinghast, Collins & Graham, Providence, RI, Kathryn A. Oberly, and J. Andrew Heaton, Washington, DC, were on brief, for appellant.

Leonard Decof, with whom Howard B. Klein and Decof & Grimm, Providence, RI, were on brief, for appellees.

Before SELYA, Circuit Judge, BOWNES, Senior Circuit Judge, and CYR, Circuit Judge.

SELYA, Circuit Judge.

Plaintiff-appellant Ernst & Young (E & Y), an accounting firm, asked the United States District Court for the District of Rhode Island to strike down R.I.Gen.Laws Sec. 42-116-40 (1993) (the Depco Act) on constitutional grounds. The district court dismissed the complaint because the controversy lacked ripeness, and, alternatively, because it invited abstention. E & Y appeals. We affirm.

I. BACKGROUND

In January 1991, Bruce Sundlun, newly inaugurated Governor of Rhode Island, proclaimed a banking emergency precipitated by the collapse of the Rhode Island Share and Deposit Indemnity Corporation (RISDIC), a firm that had insured deposits at no fewer than 45 Rhode Island-based financial institutions. ¹ Since those institutions could not operate legally without deposit insurance, see R.I.Gen.Laws Sec. 19-11-9, the Governor closed them.

The lockout provoked a financial crisis, preventing depositors from withdrawing their funds and causing consternation in a myriad of other ways. Over time, many of the affected institutions obtained insurance from sources such as the Federal Deposit Insurance Corporation, and resumed operations. Others were absorbed by insured entities. In the end ten financial institutions were unable to reopen. These financial institutions had something in common: each of them had followed uncommonly adventurous lending practices, and had become insolvent. They were all placed into conservatorship. The Rhode Island General Assembly created a public corporation, the Depositors Economic Protection Corporation (Depco), to act as the receiver, manage the failed banks' estates, marshal and liquidate their assets, repay depositors, and seek recovery from those responsible for the fiasco. ² In addition, Depco served as the receiver for RISDIC.

A special state commission charged with investigating the banking crisis found no shortage of miscreants. The commission assigned blame, inter alia, to former officers and directors of the failed institutions, certain large borrowers, the state Department of Business Regulation, the General Assembly, and a former governor. The commission reserved some of its most stinging criticism for RISDIC and those persons who occupied prominent positions in the RISDIC hierarchy. The commission included E & Y, which had provided accounting services to RISDIC and to many of its insureds, as among the parties deserving special opprobrium.

The banks' collapse proved to be a depositor's nightmare but a lawyer's dream, spawning a plethora of lawsuits. For the most part, the depositors' and creditors' suits were consolidated in a series of master complaints (one for each failed institution) docketed in the state superior court. Then, in early 1992, Depco and other plaintiffs filed a civil action in superior court against E & Y and sundry other defendants. In that suit, the plaintiffs charged E & Y with negligence and professional malpractice. Among other things, they alleged that E & Y issued unqualified (or insufficiently qualified) audit opinions to RISDIC and a number of RISDIC-insured institutions despite obvious patterns of pervasive lending irregularities and other clear portents of impending financial disaster.

In July of 1993, the General Assembly revised state law as it pertained to the RISDIC cases by passing the Depco Act, Pub.L.1993, ch. 85. The Act provides that potentially responsible parties who in good faith achieve judicially approved settlements with Depco will not be liable for contribution to other joint tortfeasors; and that, if a putative defendant settles with Depco on this basis, the potential liability of other joint tortfeasors will be reduced only by the dollar amount of the settlement, not by the settling party's pro rata share of the aggregate liability. ³

The Act transmogrifies the law of contribution for purposes of the RISDIC cases. Prior to its passage, a non-settling defendant in a negligence action--including a non-settling defendant in a RISDIC case--could, if found liable, seek contribution according to proportionate fault from all other joint tortfeasors, save only those who had entered settlements that explicitly released all claims against all potentially responsible parties for the settling tortfeasor's proportionate share of the overall liability. See R.I.Gen.Laws Secs. 10-6-7, 10-6-8, 10-6-11 (1993). In other words, prior law ensured that, if a joint tortfeasor were held responsible for (and paid) more than its ratable share of damages, it could seek contribution from other joint tortfeasors who had carried less than their fair share of the load. Under the Depco Act, however, a non-settling tortfeasor can be held liable for more than its pro rata share of damages, yet find that it has no remaining right of contribution as to some (or, conceivably, all) of the coverage paid.

E & Y did not go quietly into this dark night. It promptly sued in the federal district court, ⁴ seeking a declaration that the Depco Act, on its face and as applied to E & Y, transgresses the Federal Constitution. Specifically, E & Y urged the court to find that the Act violates the due process and equal protection clauses, and that it constitutes an unlawful bill of attainder.

In its complaint, E & Y makes various allegations designed to highlight the ostensible unfairness of the legal predicament it now faces. Stripped of animadversions, the complaint brands the Depco Act as special legislation drafted for the specific purpose of depriving E & Y of preexisting substantive rights in order to intimidate E & Y and thereby force a lucrative settlement of Depco's negligence action. ⁵ Depco's strategy, E & Y alleges, is to reach early settlements with most potentially responsible parties, limited to the face value of their respective liability insurance policies, but to treat E & Y as a "deep pocket" from whom a huge settlement can be extracted. E & Y asserts that the doubts surrounding the viability of this strategy, and particularly the profound uncertainties about the Act's constitutionality, are currently imposing a substantial hardship on E & Y in at least two ways. First, the situation creates coercive pressure on E & Y to settle the pending state court suit. Second, it deprives E & Y of the ability adequately to appraise its potential exposure.

The defendants moved to dismiss the complaint for want of subject matter jurisdiction on the ground that the case lacked ripeness, ⁶ and, as a back-up, invoked several abstention theories. The district court referred the motion to a magistrate judge, see Fed.R.Civ.P. 72(b), who recommended that the complaint be dismissed for want of subject matter jurisdiction, or, alternatively, in the exercise of the court's discretion. E & Y objected to the magistrate's report. On de novo review, the district court characterized the complaint as unripe and dismissed it under Rule 12(b)(1). See E & Y v. Depco, 862 F.Supp. 709 (D.R.I.1994). Judge Boyle stressed that since E & Y would only be damaged by the Depco Act if a series of contingent events occurred in the future, it failed satisfactorily to demonstrate that "it has sustained or is immediately in danger of sustaining a direct injury." Id. at 714-15. The judge went on to observe that, were the case ripe, comity and federalism concerns would nonetheless prompt him to abstain. ⁷ See id. at 715-16 (citing Younger v. Harris, 401 U.S. 37, 91 S.Ct. 746, 27 L.Ed.2d 669 (1971)). This appeal ensued.

II. STANDARDS OF REVIEW

A district court's determination that it lacks subject matter jurisdiction because the case before it is not ripe usually presents a question of law reviewable de novo in the court of appeals. See Broughton Lumber Co. v. Columbia River Gorge Comm'n, 975 F.2d 616, 618 (9th Cir.1992), cert. denied, --- U.S. ----, 114 S.Ct. 60, 126 L.Ed.2d 30 (1993); Shea v. Rev-Lyn Contracting Co., 868 F.2d 515, 517 (1st Cir.1989); Felmeister v. Office of Atty. Ethics, 856 F.2d 529, 535 n. 8 (3d Cir.1988). This case is no exception to the rule.

The standard of review that applies to a district court's discretionary decision to withhold a declaratory judgment is more problematic. Some courts afford plenary review, but others affirm unless the trial court's decision constitutes an abuse of discretion. Compare, e.g., Allstate Ins. Co. v. Mercier, 913 F.2d 273, 277 (6th Cir.1990) (utilizing plenary review) and Gayle Mfg. Co. v. Federal Sav. & Loan Ins. Corp., 910 F.2d 574, 578 (9th Cir.1990) (same) with, e.g., Christopher P. v. Marcus, 915 F.2d 794, 802 (2d Cir.1990) (utilizing abuse of discretion standard), cert. denied, 498 U.S. 1123, 111 S.Ct. 1081, 112 L.Ed.2d 1186 (1991), and Kunkel v. Continental Cas. Co., 866 F.2d 1269, 1273 (10th Cir.1989) (same). We have captured a middle ground, expressing our preference for a standard of independent review when passing upon a trial court's discretionary decision to eschew declaratory relief. This standard encourages the exercise of independent appellate judgment if it appears that a mistake has been made. See El Dia, Inc. v. Hernandez Colon, 963 F.2d 488, 492 (1st Cir.1992); National R.R. Passenger Corp. v. Providence & Worcester R.R. Co., 798 F.2d 8, 10 (1st Cir.1986). Thus, independent review invokes a standard more rigorous than abuse of...