Calvert Fire Ins. Co. v. American Mut. Reins. Co.

• Decision Date: 30 October 1978
• Docket Number: No. 75 C 103.,75 C 103.
• Citation: 459 F. Supp. 859
• Parties: CALVERT FIRE INSURANCE COMPANY, a Pennsylvania Corporation, Plaintiff, v. AMERICAN MUTUAL REINSURANCE COMPANY, an Illinois Corporation, Defendant.
• Court: U.S. District Court — Northern District of Illinois

459 F. Supp. 859

CALVERT FIRE INSURANCE COMPANY, a Pennsylvania Corporation, Plaintiff, v. AMERICAN MUTUAL REINSURANCE COMPANY, an Illinois Corporation, Defendant.

No. 75 C 103.

United States District Court, N. D. Illinois, E. D.

October 30, 1978.

Michael L. Weissman, Boorstein & Weissman, Chicago, Ill., for plaintiff.

Thomas J. Weithers, Hinshaw, Culbertson, Moelmann, Hoban & Fuller, Chicago, Ill., for defendant.

MEMORANDUM OPINION

BACKGROUND FACTS

WILL, District Judge.

On May 6, 1975, an order was entered in this matter staying all aspects of plaintiff Calvert Fire Insurance Company's (Calvert's) federal action that were simultaneously pending before the state court in American Mutual Reinsurance Co. v. Calvert Fire Insurance Co., No. 74 L 10737 (Cir.Ct. Cook County, Ill., filed July 3, 1974). As explained at the time in an accompanying memorandum opinion, that order was entered in the interest of efficiency and economy in litigation, and to avoid an unseemly and undignified race to judgment between two courts.

The underlying facts set forth in that memorandum opinion are incorporated herein by reference. Briefly, the case arises out of an agreement reached in early 1974 whereby Calvert became a member of American Mutual Reinsurance Company's (Amreco's) 1974 reinsurance pool along with 99 other insurance companies. In April 1974, two events of significance occurred. First, Amreco released certain financial data concerning the operation of its reinsurance pool in prior years. Second, a wave of tornadoes struck the Midwest assuring that the 1974 reinsurance pool members would suffer heavy losses. Shortly after these two events, Calvert notified Amreco that it was rescinding its membership in the pool ab initio.

Soon thereafter, in July 1974, Amreco sued Calvert in state court on behalf of the pool alleging and seeking a judgment that Calvert was responsible for its share of any losses. In January 1975, following a number of technical motions, Calvert filed its answer, defending on the grounds that it had been induced to join the pool by material misrepresentations which had come to light only with the release of the financial data in April 1974. Calvert also filed a counterclaim for $2 million damages, even though it had yet to pay anything to the pool. A number of state and federal statutes, including the Securities Act of 1933 (1933 Act) and the Securities Exchange Act of 1934 (1934 Act), were invoked by Calvert in support of its position.

On the same day that it filed its answer and counterclaim in the state court, Calvert brought this action against Amreco in federal court for a declaration that it had been misled into joining the pool and therefore owed nothing to Amreco, and for the same $2 million in damages.¹ The identical state and federal statutes were invoked by Calvert.

The substantive issue before both courts was identical: whether Calvert validly rescinded its membership in the pool. If Calvert was materially misled into joining the pool, Amreco will not recover. If Calvert was not so misled, Amreco will recover. The issue and result is the same in both courts under any of Calvert's various legal theories.²

There was only one difference between Calvert's positions in the state and federal courts. While it had pleaded rule 10b-5 under the 1934 Act as grounds for rescission in both courts, it had alleged rule 10b-5 as grounds for damages only in the federal court action, presumably because of the exclusive jurisdiction granted to federal courts over suits to enforce damage liabilities created by the 1934 Act, 15 U.S.C. §§ 78a et seq. This was obviously a questionable claim, however, because as counsel for Calvert candidly admitted in argument to the Supreme Court, there are no damages to be recovered by Calvert in this case, and rescission is the relief which Calvert really seeks. See Will v. Calvert Fire Insurance Co., Transcript of Oral Argument of April 19, 1978 at 32-33, 35-36.

If this were not the case — if Calvert were genuinely seeking relief under rule 10b-5, relief that the state court was without jurisdiction to award — this Court's decision on the motion to stay might well have been different. See Will v. Calvert Fire Insurance Co., 437 U.S. 655, 668, 98 S.Ct. 2552, 2561, 57 L.Ed.2d 504 (Brennan, J., dissenting); Cotler v. Inter-County Orthopaedic Association, 526 F.2d 537 (3d Cir. 1975).

The issues before the state and federal courts are, therefore, substantially identical. In recognition of this fact, we invited Judge Arthur Dunne of the Circuit Court of Cook County, before whom the state court case was pending, to sit with us for the oral argument on the question of whether a participation in the reinsurance pool in question was a security under the 1933 and 1934 Acts. At that oral argument, counsel for Calvert contended that it was a security and counsel for Amreco that it was not.

At the time of this Court's stay order, it had been our expectation that we and not the state court would rule upon the specific legal issue of whether Calvert's participation in the reinsurance pool involved the sale of a security by Amreco to Calvert within the meaning of the federal securities laws. Accordingly, we were prepared to decide the "security" issue in the first instance to assure Calvert a prompt adjudication of that preliminary question.

The "security" issue, however, was shortly thereafter decided by the state court in an order by Judge Dunne dated June 16, 1975, striking certain counts of Calvert's counterclaim on the ground that the reinsurance agreement was not a security under either the 1933 or 1934 Acts or under Illinois law, a decision which has since been affirmed on appeal, American Mutual Reinsurance Co. v. Calvert Fire Insurance Co., 52 Ill.App.3d 922, 9 Ill.Dec. 670, 367 N.E.2d 104 (1977), cert. denied, 436 U.S. 906, 98 S.Ct. 2238, 56 L.Ed.2d 404 (1978). Following Judge Dunne's order, which decided the security issue under both the 1933 and 1934 Acts, all proceedings in this Court were stayed until such time as it would appear that either of the litigants required that the stay be terminated to assure a speedy and just adjudication. Because of this possibility, periodic status conferences have been held in this Court to monitor the progress of the state litigation.

Since the state courts clearly had jurisdiction over all the 1933 and 1934 Act claims except the dubious claim for money damages, and since Judge Dunne had held that there was no security under either the 1933 or 1934 Acts or under Illinois law, Calvert had no apparent need for a federal adjudication of whether or not the reinsurance pool agreement constituted a security under either the 1933 or 1934 Act. We concluded, therefore, that Calvert's demand that we decide the same questions already determined by the state court was intended to delay the proceedings in the state court and to obtain two adjudications with two possible appeals of the same legal issue.

It seemed obvious to us that this federal action, which was filed six months after Amreco instituted the state court suit on behalf of the pool, and on the same day Calvert filed its answer in the state court, was a reactive defensive maneuver. As previously indicated, the only issue in its federal complaint which was not in its state court answer was the 1934 Act damages claim. Since Calvert had paid nothing, there were, as Calvert's counsel acknowledged to the Supreme Court, no damages which it could possibly recover.

We concluded, therefore, that the federal case was primarily a tactical maneuver to delay the determination of whether or not Calvert owes the pool its share of the 1974 losses. That Calvert was not basically interested in a federal determination of whether or not the reinsurance pool involved a security also seemed obvious to us from the fact that it had not removed the state court action to the federal court which, as a non-resident, it was entitled to do. 28 U.S.C. § 1441(a), (b). It chose to answer in the state court and file this duplicative action.³

Whatever Calvert's motivation in filing this action, it is clear that the question of whether or not Calvert was misled is relevant to all the defenses asserted by it in the state court action and has no special significance in its theoretical 1934 Act damages claim.

THE MANDAMUS ACTION

Pursuant to a petition by Calvert, the United States Court of Appeals for the Seventh Circuit on August 15, 1977, issued a writ of mandamus ordering this Court "immediately" to adjudicate certain of Calvert's claims (those arising under the 1934 Act), Calvert Fire Insurance Co. v. Will, 560 F.2d 792 (1977), and implying that other of Calvert's claims should be adjudicated immediately as well, see id. at 798 n.6. The court of appeals reasoned that, while this Court's stay when granted had been correct under prior law, that prior law had been overruled by the decision of the Supreme Court in Colorado River Water Conservation District v. United States, 424 U.S. 800, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976).

On June 23, 1978, the court of appeals' decision granting the writ of mandamus was reversed by the Supreme Court. Will v. Calvert Fire Insurance Co., 437 U.S. 655, 98 S.Ct. 2552, 57 L.Ed.2d 504 (1978).

As a result of the unusual procedural history of this case, which has seen the grant of two extraordinary writs by higher courts, it is appropriate at this time to clarify the posture of the litigation in this Court. Accordingly, we exercise our discretion this day and order that all aspects of Calvert's federal action continue to be stayed because all significant aspects of Calvert's federal action are before the state court. This stay is not final, and will be vacated if — but only if — it is demonstrated by either litigant that the avoidance of unfair prejudice so requires.

The stay granted this day is not "simply the product of the normal excessive load of business in the District...