Black, Davis & Shue Agency, Inc. v. Frontier Ins. Co. in Rehab. (In re Black, Davis & Shue Agency, Inc.)

Decision Date02 February 2012
Docket NumberBankruptcy No. 1–06–bk–00051MDF.,Adversary No. 1–11–ap–00160MDF.
Citation471 B.R. 381
PartiesIn re BLACK, DAVIS, AND SHUE AGENCY, INC., Debtor. Black, Davis and Shue Agency, Inc., Plaintiff v. Frontier Insurance Company in Rehabilitation, Defendant.
CourtU.S. Bankruptcy Court — Middle District of Pennsylvania


Recognized as Unconstitutional

28 U.S.C.A. § 157(b)(2)(C)

Carl E. Harvison, Jamie L. Lenzi, Cipriani and Werner, P.C., Pittsburgh, PA, Robert L. Knupp, Knupp Law Offices, LLC, Harrisburg, PA, for Plaintiff.

Joseph B. Sobel, Harrisburg, PA, for Defendant.


MARY D. FRANCE, Chief Judge.

I. Introduction

Before me is a motion to dismiss or stay (“Motion”) the litigation of certain counterclaims setoffs asserted by Black, Davis and Shue Agency, Inc. (Debtor) against Frontier Insurance Company in Rehabilitation (Frontier) in response to claims filed by Frontier in Debtor's case. For the reasons set forth below, the Motion will be granted in part and denied in part.

Debtor is an insurance agency located in Harrisburg, Pennsylvania. Prior to 2001, Frontier was an insurance carrier headquartered in New York whose business included underwriting lines of workers' compensation insurance. The case before me arises from a contract executed between Frontier and Debtor in October 2000 (the Agency Agreement). Under the terms of the Agency Agreement, Frontier was to underwrite workers' compensation insurance, and Debtor was to act as its agent by marketing and servicing policies for professional employer organizations (“PEOs”).1 The Agency Agreement also involved the creation of an offshore insurance provider, formed by Debtor's principals and a third party, to reinsure the policies issued by Frontier.

In the two proofs of claims filed in Debtor's bankruptcy case, Frontier asserts claims for damages as a result of Debtor's breach of the Agency Agreement. In the counterclaims filed in this adversary proceeding, Debtor alleges that it was Frontier, not Debtor, who breached the Agreement. The claims and counterclaims before me are complicated by the insolvent status of Frontier, which a New York state court placed into receivership in 2001. On January 3, 2005, Frontier's receiver, Gregory V. Serio (“Serio” or the “Receiver”) filed a lawsuit against Debtor in the District Court for the Southern District of New York at Case No. 05Civ15(MHD) seeking damages allegedly sustained as a result of Debtor's breach of the Agency Agreement (hereinafter “the New York Federal Litigation”). The Receiver filed the action in federal court because of “the national and international scope of the facts and circumstances” of the case. (Declaration of H. Neal Conolly, Case No. 1–06–bk–00051MDF, Docket # 574–7.) Among other allegations, Frontier alleged that Debtor breached the Agency Agreement by collecting premiums from clients and failing to remit them to Frontier. In response, Debtor filed counterclaims against Frontier alleging that, inter alia, Frontier breached the Agency Agreement by failing to audit premium payments. Magistrate Judge Dolinger (“Judge Dolinger”), who was assigned to hear the case, issued an order in October 2005 in which he abstained from deciding Debtor's counterclaims. In December 2005, Judge Dolinger issued a mandatory preliminary injunction requiring Debtor to escrow approximately $1.5 million in premium payments received. In response to the injunction, Debtor filed the within bankruptcy case. Frontier filed two proofs of claim in the case reasserting allegations it alleged as the plaintiff in the New York Federal Litigation. In turn, Debtor filed the above-captioned adversary action reasserting the counterclaims it raised as the defendant in the same litigation.

In the within Motion, Frontier argues alternatively: (1) that Debtor is barred by the RookerFeldman doctrine from asserting counterclaims against Frontier that are identical to claims stayed by Judge Dolinger in the New York Federal Litigation; (2) that this Court should take judicial notice of the findings in Judge Dolinger's injunction order and bar Debtor under principles of preclusion from relitigating issues decided in that matter; (3) that this Court should adopt Judge Dolinger's reasoning and stay Debtor's counterclaims, other than setoffs for commissions, if any, owed to Debtor; (4) that this Court is stayed from adjudicating Debtor's counterclaims by the general stay of claims issued in the state court receivership; and (5) that some or all of the counterclaims should be dismissed under Federal Rule of Civil Procedure (“Fed. R. Civ.P.”) 12(b)(6) if this Court undertakes a review of Debtor's counterclaims independent of the review conducted by Judge Dolinger.2

Resolution of Frontier's Motion requires consideration of the unusual posture of this case. First, the plaintiff in the New York Federal Litigation was the Receiver. His mandate under state law to marshal Frontier's assets for purposes of rehabilitation or liquidation must be weighed against Debtor's right to reorganize under the Bankruptcy Code. Second, Judge Dolinger issued two opinions in which he made findings about the merits of the parties' claims and determined that certain claims against Frontier should be litigated in the state court receivership. In the matter to be decided herein, the parties disagree as to whether this Court is bound by those findings. Third, while Frontier's Motion invokes legal principles related to abstention and comity, additional issues of this Court's constitutional authority to hear Debtor's counterclaims have arisen as a consequence of the Supreme Court's decision in Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), which was handed down while Frontier's Motion was pending. Issues presented as a consequence of the Stern decision must also be addressed.

In the Background below, I will set forth the history of the parties' relationship as it may be gleaned from the pleadings and discuss the terms of the Agency Agreement to the extent that they are not disputed. In the ensuing Discussion, I will address issues of preclusion and comity that have arisen because of the concurrent proceedings in the Frontier receivership in addition to the prior decisions issued by Judge Dolinger in the New York Federal Litigation. I also will assess the impact of the Stern decision on the Court's constitutional authority to decide counterclaims asserted by Debtor. Finally, I will also consider whether it is appropriate to dismiss any counts of the Adversary Complaint under Fed.R.Civ.P. 12(b)(6)3 and whether any form of abstention is warranted.

II. Procedural History

On October 15, 2001, an Order was issued by the Supreme Court of the State of New York, County of New York, (hereinafter “the Rehabilitation Order”) appointing the Receiver to take possession of Frontier's assets and attempt to rehabilitate the company. Included in the October 15, 2001 Order was a provision enjoining “all persons ... from commencing or prosecuting any actions, lawsuits, or proceedings against Frontier or the Superintendent as Rehabilitator.” (Motion to Dismiss/Stay Counterclaims, Case No. 1–06–bk–00051MDF, Docket # 574, Ex. E–2, p. 16.)

On January 3, 2005, the Receiver filed the New York Federal Litigation for breach of contract. On March 11, 2005, Debtor filed its answer and counterclaims for breach of contract against Frontier. In a Memorandum and Order issued on October 11, 2005, Judge Dolinger stayed the counterclaims in deference to Frontier's ongoing rehabilitation proceedings in state court. Serio v. Black, Davis & Shue Agency, Inc., Case No. 05 Civ 15(MHD), 2005 WL 2560390 (S.D.N.Y. October 11, 2005) (hereinafter “ Serio I ”). He did not, however, stay litigation of Debtor's claim to set off commissions against premiums collected.4

On December 30, 2005, in response to Frontier's petition for a preliminary injunction against Debtor, Judge Dolinger issued a Memorandum and Order compelling Debtor to deposit the sum of $1,491,215.76 into court as a bond against a final judgment. Serio v. Black, Davis & Shue Agency, Inc., No. 05 Civ. 15(MHD), 2005 WL 3642217 (S.D.N.Y. December 30, 2005). (hereinafter “ Serio II ”). On January 16, 2006, Debtor filed its bankruptcy petition in order to stay enforcement of the mandatory injunction issued in the New York Federal Litigation.

On April 14, 2006, Frontier filed a proof of claim in Debtor's case in the amount of $3,115,613. The “Basis for Claim” was described as Debtor's [b]reach of contract—failure to properly estimate insurance premiums.” On September 9, 2010, Frontier amended the claim, increasing the amount to $4,288,705 to include interest on the damages included in the original proof of claim (“Amended POC 12). Amended POC 12 further altered the “Basis for Claim” to read “Breach of Contract—See attached.” The Agency Agreement, the New York Federal Litigation complaint, and the Serio II preliminary injunction order were attached in addition to a Supplement stating that, inter alia, Debtor had “failed to properly calculate, estimate, or formulate the correct amounts of initial premiums due....” (Amended POC 12, Supp.)

On the same date, Frontier filed a second proof of claim, based upon “Breach of Contract—failure to remit funds” in the amount of $2,885,515. On September 9, 2010, Frontier amended the second claim to include interest on the damages set forth in the original proof of claim (“Amended POC 13). Amended POC 13 also added language to the “Basis for Claim” statement on the form and attached the Agency Agreement, the New York Federal Litigation complaint, the Serio II order, and a Supplement stating that “Debtor improperly and negligently failed to pay [Frontier] all premiums collected, minus its commission and act as trustee and hold all monies collected in a fiduciary capacity.” (Amended POC 13, Supp.)

On October 11, 2010, Debtor filed Objections to Amended POC 12 and Amended POC 13.5 On February 16,...

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