Axa Corp Solutions v. Underwriters Reinsurance

• Decision Date: 17 October 2003
• Docket Number: No. 02-3795.,No. 02-3959.,02-3795.,02-3959.
• Citation: 347 F.3d 272
• Parties: AXA CORPORATE SOLUTIONS, Plaintiff-Appellant/Cross-Appellee, v. UNDERWRITERS REINSURANCE CORPORATION, Defendant-Appellee/Cross-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

347 F.3d 272

AXA CORPORATE SOLUTIONS, Plaintiff-Appellant/Cross-Appellee, v. UNDERWRITERS REINSURANCE CORPORATION, Defendant-Appellee/Cross-Appellant.

No. 02-3795.

No. 02-3959.

United States Court of Appeals, Seventh Circuit.

Argued February 27, 2003.

Decided October 17, 2003.

Joel T. Pelz, Richard T. Franch, Megan B. Poetzel (argued), Jenner & Block, Chicago, IL, for Plaintiff-Appellant/Cross-Appellee.

Robert C. Johnson (argued), Sonnenschein, Nath & Rosenthal, Chicago, IL, for Defendant-Appellee/Cross-Appellant.

Before KANNE, DIANE P. WOOD, and EVANS, Circuit Judges.

DIANE P. WOOD, Circuit Judge.

This case involves dueling lawsuits in Illinois and Texas; our task is to decide whether the federal district court in Illinois should have abstained as a matter of federal law, whether an Illinois statute designed to prevent wasteful and duplicative litigation in the state's courts applies, and whether the proper response is to continue with the Illinois case, to stay the Illinois case, or to dismiss it altogether. Behind all this is the motion picture financing industry — specifically, certain products called insurance-backed film financing. The participants in this business include the lenders to the film producers, insurers for the lenders, and reinsurers for the insurers. One of those insurers was Underwriters Reinsurance Company (URC), which agreed to insure a five-picture Master Facility to which Chase Manhattan Bank had loaned funds. AXA Corporate Solutions (AXA) agreed to reinsure part of that risk. Acrimony broke out among all parties, which led to a suit brought by AXA against URC in the Northern District of Illinois, and then to a suit by Chase against URC and the reinsurers other than AXA in Texas state court. Later, URC brought a third-party complaint against AXA in the Texas action.

Faced with this mess, URC moved in the Illinois action for a stay or dismissal under the abstention principles set forth in Colorado River Water Conservation District v. United States, 424 U.S. 800, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976), or alternatively under 735 ILL. COMP. STAT. 5/2-619(a)(3), an Illinois state statute providing for discretionary dismissal of a complaint if there is another action pending between the same parties covering the same claim. The district court found Colorado River abstention inappropriate, but it concluded that the Illinois statute was sufficiently "substantive" that it had to be applied in this diversity case, and moreover that it required the dismissal of AXA's suit against URC. AXA appeals, and URC has cross-appealed from the district court's refusal to order a stay under Colorado River in the alternative. We conclude that it was error to dismiss the action based on the state law, but that the district court did not abuse its discretion in concluding that Colorado River abstention was inappropriate here. The case must therefore return to the district court for further proceedings.

I

At the heart of these business arrangements was the motion picture company George Litto Productions. Chase had loaned money to Litto, and URC issued a Cash Flow Insurance Policy insuring Chase against shortfalls in the repayments of the Litto loans. In 1997, AXA (a French corporation with its principal place of business in Paris, France) entered into a contract with URC (a New Hampshire corporation with its principal place of business in California), in which AXA agreed to reinsure URC for a portion of its obligations under the Cash Flow policy. As part of the deal, Chase and URC insisted that the reinsurers each sign a Loss Payee Endorsement that would permit Chase to collect directly on the policy.

AXA's agreement to reinsure the transaction was made on the express condition that the reinsurance contract would include a provision requiring all disputes to be settled in New York courts under New York law. In order to meet this obligation, URC ideally would have issued its insurance policy in New York. It later learned, however, that it did not have the necessary license to issue policies in New York, and so it proposed to issue the policy in Texas with the inclusion of a provision providing for New York law and jurisdiction. The latter proved to be impossible, after the Texas Department of Insurance informed URC in October 1998 that it would not approve a policy calling for New York law and jurisdiction. Without advising AXA or any other reinsurer of this complication, URC went ahead with the Texas policy, which included a forum selection clause providing for Texas jurisdiction and Texas law. Later, in 1999, URC did the same thing again for a scaled-down film project, once again asking the Texas regulators to approve a clause choosing New York courts and law, and once again settling for a clause choosing Texas courts and law.

AXA found out in late June or early July 1999 that URC had not been forthcoming with it, and that the contracts specified did not have the necessary choice of law and forum clauses. It immediately informed URC that the provisions calling for Texas law and fora were unacceptable, and it threatened to pull out of the deal. URC urged it to stay, pointing out that the insurers would not face any real risk until the first film was delivered, approximately a year later. During the interim period, URC promised, it would change the state in which the policy was issued to one that would approve the choice of New York. Illinois was one candidate. URC contacted the Illinois Department of Insurance to find out what its position would be; it then represented to AXA that the Illinois authorities would approve a policy calling for New York law and jurisdiction. AXA agreed to go forward on the condition that URC promptly file in Illinois, use its best efforts to obtain clauses choosing New York law and New York courts, or, failing that, Illinois law and Illinois courts. URC agreed to all of this, both orally and in writing. But in the end it refused to make the promised refiling in Illinois and instead contacted AXA and demanded that AXA accept a number of alterations to the contract required by a side agreement URC had arranged with Chase in the meantime. When AXA refused to agree to these revisions, the lawsuits began.

In October 1999, AXA sued Chase in New York state court seeking a declaration that it was not liable to Chase for any losses relating to the secured loans. The case was then consolidated with a similar action Chase had brought against AXA. Things did not go well for AXA: Chase ultimately won a declaration that AXA was in fact on the hook for the secured loans, and a New York state appeals court affirmed, Chase Manhattan Bank v. AXA Reinsurance, 294 A.D.2d 245, 741 N.Y.S.2d 867 (N.Y.App.Div.2002). On April 26, 2002, AXA brought this case against URC in the Northern District of Illinois, seeking rescission of the contract, a declaratory judgment that URC was liable for any losses sustained by Chase, and damages. On the same day, Chase sued URC and several other reinsurers (but not AXA) in Texas state court. URC responded with, among other things, a third-party complaint against AXA. URC then asked the Illinois district court for a stay or dismissal under Colorado River or under § 2619(a)(3), the Illinois statute that authorizes dismissal where "there is another action pending between the same parties for the same cause." The district court refused to abstain under Colorado River, but it granted URC full dismissal under § 2619(a)(3).

II

Because the district court's ruling under § 2-619(a)(3) had the effect of disposing of the entire case, we begin with the question whether that ruling was correct. If so, AXA's case in Illinois is at an end; if not, the question remains whether Colorado River abstention was proper, or if the case should proceed despite the existence of the parallel Texas action. The relevant portions of § 2-619(a)(3) read as follows:

Involuntary dismissal based upon certain defects or defenses. (a) Defendant may, within the time for pleading, file a motion for dismissal of the action or for other appropriate relief upon any of the following grounds.

* * * * * *

(3) That there is another action pending between the same parties for the same cause.

735 ILL. COMP. STAT. 5/2-619(a).

In deciding a § 2-619(a)(3) motion, Illinois courts consider a range of factors that closely resemble those that a federal court would consider under Colorado River (which we discuss in more detail below). These include "comity; the prevention of multiplicity, vexation, and harassment; the likelihood of obtaining complete relief in the foreign jurisdiction; and the res judicata effect of a foreign judgment in the local forum." May v. SmithKline Beecham Clinical Labs., Inc., 304 Ill.App.3d 242, 237 Ill.Dec. 830, 710 N.E.2d 460, 463 (Ill.App.Ct.1999). Illinois state courts also evaluate whether the case bears a "legitimate and substantial relation to Illinois." A.E. Staley Mfg. Co. v. Swift & Co., 84 Ill.2d 245, 50 Ill.Dec. 156, 419 N.E.2d 23, 27 (Ill.1980). In most cases, the analysis comes down to a simple weighing of "the prejudice to the nonmovant if the motion is granted against the policy of avoiding duplicative litigation." Kapoor v. Fujisawa Pharm. Co., 298 Ill.App.3d 780, 232 Ill.Dec. 910, 699 N.E.2d 1095, 1100 (Ill.App.Ct. 1998); see also Crain v. Lucent Techs., Inc., 317 Ill.App.3d 486, 250 Ill.Dec. 876, 739 N.E.2d 639, 647 (Ill.App.Ct.2000). Moreover, in contrast to the "unflagging obligation" of district courts to exercise jurisdiction and also the "exceptional" nature of the entry of a stay under Colorado River, 424 U.S. at 813, 817, 96 S.Ct. 1236, the dismissal provisions of § 2619(a)(3) "should be construed liberally." Vill. of Mapleton v. Cathy's Tap, Inc., 313 Ill.App.3d 264, 246 Ill.Dec. 203, 729 N.E.2d 854, 856 (Ill.App.Ct.2000).

The overriding issue is whether this statute, which relates so closely to the use to which Illinois wishes to put its courts, is...