Law Enforcement Ins. Co., Ltd. v. Corcoran

• Decision Date: 12 December 1986
• Docket Number: No. 312,D,312
• Citation: 807 F.2d 38
• Parties: LAW ENFORCEMENT INSURANCE COMPANY, LTD., Plaintiff-Appellant, v. James P. CORCORAN, Defendant-Appellee. ocket 86-7658.
• Court: U.S. Court of Appeals — Second Circuit

Page 38

807 F.2d 38

55 USLW 2349

LAW ENFORCEMENT INSURANCE COMPANY, LTD., Plaintiff-Appellant, v. James P. CORCORAN, Defendant-Appellee.

No. 312, Docket 86-7658.

United States Court of Appeals,

Second Circuit.

Argued Oct. 24, 1986.

Decided Dec. 12, 1986.

Frank H. Wright, New York City (Grand & Ostrow, New York City, of counsel), for plaintiff-appellant.

Thomas M. Campbell, New York City (Mathias E. Mone, Marc J. Korpus, Cahill, Gordon & Reindel, New York City, of counsel), for defendant-appellee.

Before KAUFMAN, NEWMAN and PRATT, Circuit Judges.

IRVING R. KAUFMAN, Circuit Judge:

We are required in this case to revisit a recurring tension in our dual system of justice. The federal courts have a fundamental obligation to adjudicate controversies within their jurisdiction. Yet they also have a duty to abstain from doing so when the case falls within one of the narrow recognized categories of instances in which, because of related state proceedings, action by the federal courts would be thoroughly unproductive.

We have concluded that this is one of those rare cases in which the federal courts should, in deference to a state forum, withhold access from a suitor properly invoking their jurisdiction. Specifically, because continuation of the federal action here would disrupt New York's unified administrative and judicial framework for the administration of the estates of insolvent insurance companies, we hold that the federal plaintiff must, in the first instance at least, seek relief from the New York courts.

FACTS

The relevant facts are straightforward and not in dispute. Law Enforcement Insurance Company, Ltd. ("LEICL") is a Bermuda insurance company that was established in 1977 to provide coverage to law enforcement personnel against liabilities arising from civil rights actions.

In December of 1983, LEICL entered into an agreement with Ideal Mutual Insurance Company ("Ideal"), a New York company. The parties agree that this agreement required Ideal to assume the obligation to provide reinsurance on various LEICL policies. In addition, LEICL claims that the agreement required Ideal to assume LEICL's direct insurance obligation on the policies that had been issued during the year 1977.

In late December of 1983, the Superintendent of Insurance of the State of New York ("Superintendent") commenced a proceeding in the Supreme Court, New York County, pursuant to N.Y.Ins.L. Sec. 7402 alleging that Ideal was insolvent and asking to be named as rehabilitator. An order to this effect was entered by that court on December 26, 1984.

In January of 1985, having concluded that further attempts to rehabilitate Ideal would be futile, the Superintendent sought from the same court an order pursuant to N.Y.Ins.L. Sec. 7417 terminating the rehabilitation proceeding and vesting the business of Ideal in himself for the purpose of liquidating it. On February 7, 1985, the court entered the requested order, which, pursuant to N.Y.Ins.L. Sec. 7419, included a provision enjoining all persons with claims against Ideal "from bringing or further prosecuting any action at law, suit in equity, special or other proceeding against the said corporation or its estate, or the Superintendent and his successors in office, as Liquidator thereof."

LEICL informed the Superintendent of its view that Ideal was obligated under the 1983 agreement to defend and pay claims on the 1977 policies, and received in response a letter rejecting its position.

On February 7, 1986, LEICL filed an action against the Superintendent in the United States District Court for the Southern District of New York. Premising jurisdiction upon diversity of citizenship, the action sought a declaration that Ideal was obligated as a direct insurer on the 1977 policies.

The Superintendent responded to the complaint by moving for an order dismissing the action in deference to the state liquidation proceedings. After full briefing and oral argument, the district court granted the motion. In an opinion reported at 640 F.Supp. 271 (S.D.N.Y.1986), it held that, under the doctrine of Colorado River Water Conservation District v. United States, 424 U.S. 800, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976), it should abstain from exercising its jurisdiction. LEICL appeals.

DISCUSSION

The Supreme Court of the United States has identified four categories of cases in which federal courts should abstain in deference to state courts, two of which are relevant here. ¹ While usefully separated for purposes of analysis, these categories are not watertight, and in considering the factors applicable to each category, the federal courts are not to apply "a mechanical checklist," but rather are to conduct "a careful balancing of the important factors as they apply in a given case, with the balance heavily weighted in favor of the exercise of jurisdiction." Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 16, 103 S.Ct. 927, 937, 74 L.Ed.2d 765 (1983). Because these factors are "to be applied in a pragmatic, flexible manner with a view to the realities of the case at hand," id., at 21, 103 S.Ct. at 940, the district court is granted some latitude in its decisionmaking; our review applies an abuse of discretion standard. Bethlehem Contracting Co. v. Lehrer/McGovern, Inc., 800 F.2d 325, 327 (2d Cir.1986). ²

With these principles in mind, we consider the application to this case of two categories of abstention. Since the district court confined its consideration to the possible applicability of Colorado River, supra, we begin our analysis at that point. ³

I. Colorado River Abstention

In Colorado River, the Supreme Court faced a factual situation in which state court litigation seeking to settle certain water rights threatened to proceed concurrently with a suit on the same subject brought by the United States on its own behalf and that of several Indian tribes against some 1,000 defendants in a distant federal courthouse. Faced with facts that did not fall within any of the narrow recognized grounds for abstention, the Court decided to recognize a new limited class of "exceptional" cases in which "for reasons of wise judicial administration" and conservation of resources, a federal court should defer to concurrent state proceedings, Colorado River, supra, 424 U.S. at 818, 96 S.Ct. at 1246.

In Moses H. Cone, the Court reaffirmed the doctrine, while emphasizing the rarity of its application by declining to apply it to the facts at hand, adding, as noted, that the federal courts' weighing of cases must be "with the balance heavily weighted in favor of the exercise of jurisdiction," Moses H. Cone, supra, 460 U.S. at 16, 103 S.Ct. at 937.

In light of this "heavy presumption favoring the exercise of jurisdiction," Bethlehem Contracting, supra, 800 F.2d at 327, we believe that the decision of the district court to dismiss on Colorado River grounds was erroneous. This conclusion follows from a considered weighing of the various factors which the precedents counsel are to be evaluated in determining whether the circumstances are "exceptional."

(a) Avoidance of Piecemeal Litigation

The district court viewed as the strongest exceptional circumstance here that opening the doors of the federal courthouse to LEICL would similarly open them to "countless other plaintiffs" nationwide. While this fear was soundly based, it did not of itself provide a basis for Colorado River abstention. ⁴

The "danger of piecemeal litigation" was the paramount factor in the Supreme Court's approval of abstention in Colorado River, which involved a federal statute, the McCarran Amendment, whose "primary policy" was the avoidance of piecemeal litigation. Moses H. Cone, supra, 460 U.S. at 19 & 20 n. 22, 103 S.Ct. at 938 & 939 n. 22. In Moses H. Cone, in contrast, the Court agreed that the result of a refusal to abstain would be duplicative litigation, but refused to give this consequence any weight, since it resulted from the demands of the relevant federal law, in that case the federal Arbitration Act. Id. at 20, 103 S.Ct. at 939.

Here, the danger of suits nationwide arises solely as a result of the existence of diversity jurisdiction. And while there have been many scholarly and judicial expressions of doubt as to the desirability of its continuation, so long as Congress chooses to have us exercise diversity jurisdiction, we must do so unflaggingly.

LEICL informs us in its brief that it chose a federal forum because of "concern that its status as a foreign corporation and the fact that LEICL was suing the New York Superintendent of Insurance would redound to prejudice LEICL's position in a state court action." Whatever our view of the validity of that fear, Congress has given LEICL--and, by extension, plaintiffs in the same position--the right to act on it, and "we have a duty to respect that right." Giardina v. Fontanta, 733 F.2d 1047, 1053 (2d Cir.1984).

Thus, the factor upon which the district court relied most heavily was not an exceptional circumstance within the meaning of Colorado River. It was, rather, an unremarkable result of the application to this case of a considered federal policy. Cf. Lumbermens Mutual Casualty Co. v. Connecticut Bank & Trust Co., 806 F.2d 411 (2d Cir.1986) (nationwide suits against insurance company exceptional circumstance under Colorado River where failure to abstain could lead to inconsistent interpretations of same policy).

(b) Control of a Res

In Colorado River, the Court noted a line of cases holding that a "court first assuming jurisdiction over property may exercise that jurisdiction to the exclusion of other courts." Colorado River, supra, 424 U.S. at 818, 96 S.Ct. at 1246.

However, the mere fact that the federal and state proceedings concern the same subject matter does not make a case exceptional. Colorado River, supra, 424 U.S. at 816, 96 S.Ct. at 1245. Rather, this rationale applies only where the exercise by one court of its jurisdiction would tend to...