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

• Decision Date: 27 June 1979
• Docket Number: No. 78-2638,78-2638
• Citation: 600 F.2d 1228
• Parties: CALVERT FIRE INSURANCE COMPANY, Plaintiff-Appellant, v. AMERICAN MUTUAL REINSURANCE COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1228

600 F.2d 1228

CALVERT FIRE INSURANCE COMPANY, Plaintiff-Appellant, v. AMERICAN MUTUAL REINSURANCE COMPANY, Defendant-Appellee.

No. 78-2638.

United States Court of Appeals Seventh Circuit.

Argued April 18, 1979.

Decided June 27, 1979.

Louis Loss, Cambridge, Mass., for plaintiff-appellant.

Thomas J. Weithers, Chicago, Ill., for defendant-appellee.

Before CASTLE, Senior Circuit Judge, and CUMMINGS and SPRECHER, Circuit Judges.

CASTLE, Senior Circuit Judge.

This case raises questions relating to the power of a federal district judge to stay a federal suit involving questions of federal law which have already been decided in a parallel state suit ¹ when he determines that the federal suit has been brought to delay the state proceeding. Such a deferral to a state court for reasons of "wise judicial administration" not falling within the ambit of the abstention doctrine was first recognized by 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), although the power of one federal court to defer to another federal court for such reasons had long been recognized by the Supreme Court. ² Specifically, we must decide how such a power would be affected by the fact that the federal plaintiff seeks relief under the Securities Exchange Act of 1934, which contains a provision vesting exclusive jurisdiction in the federal courts, although that provision has not been interpreted to extend to the particular type of 1934 Act relief (rescission) sought by Calvert in its federal suit.

American Mutual Reinsurance Company (Amreco) solicited Calvert Fire Insurance Company's (Calvert) participation in its reinsurance pool, composed of 99 other insurance companies which shared the profits and losses of the pool. In early 1974, Calvert agree to participate for the year 1974. In April of that year, two events of significance occurred. First, Amreco issued financial information relating to the pool's performance in 1973; and, second, a wave of tornadoes struck the Midwest, assuring that the pool would suffer losses for the year 1974. Under the terms of the participation agreement, Calvert would become liable for its share of the 1974 losses. By telegram of April 19, 1974, Calvert requested that Amreco terminate its membership in the pool, retroactive to January 1, 1974. In a follow-up letter, Calvert explained that it would never have joined the pool had it been informed, prior to signing the participation agreement, of the extent of the pool's losses in 1973. ³

On July 7, 1974, Amreco filed a suit in state court to obtain a declaration that the participation agreement was still in full force and effect. Calvert defended at first on the ground that a declaratory action was not an appropriate remedy for breach of contract, and then on the ground that the action should be transferred from the Law Division to the Equity Division. Unsuccessful in both these arguments, Calvert sought certification of these issues for interlocutory appeal and stay of discovery pending their final resolution. Certification was denied.

On January 15, 1975, a full six months after the filing of Amreco's declaratory judgment action, Calvert first raised the affirmative defense that it was misled by Amreco during the negotiations leading to the signing of the participation agreement and, accordingly, was entitled to rescission of the agreement. In support of this new argument, it cited the state common law of fraud and also the anti-fraud provisions of state and federal securities acts. ⁴ Securities law was invoked on the theory that a participatory interest in a reinsurance pool constitutes a "security" which was "sold" to Calvert within the meaning of the securities acts. Calvert also filed a counterclaim for two million dollars in damages on all the same legal theories asserted in its defense with the conspicuous exception of the 1934 Securities Exchange Act.

On the same day it filed its state defense and counterclaim on the above fraud theories, Calvert filed a federal suit for rescission and two million dollars in damages on all the same legal theories, with the addition of the 1934 Act, which it had not pled in its state counterclaim for damages.

On May 6, 1975, Judge Hubert Will of the Northern District of Illinois, to whom the federal suit had been assigned, entered an unpublished order and memorandum opinion staying all aspects of Calvert's federal suit concurrently before the state court. The stay extended to all the theories cited by Calvert in state court, including the 1934 Act claim for rescission, since we have interpreted Section 27 of the 1934 Act ⁵ to allow concurrent jurisdiction in the state courts of 1934 Act defenses to a state cause of action. Aetna State Bank v. Altheimer, 430 F.2d 750, 754 (7th Cir. 1970); ⁶ Accord, Shareholders Management Co. v. Gregory, 449 F.2d 326 (9th Cir. 1971); II Loss, Securities Regulation 977-980 (2d ed. 1961); Cf. Pan American Petroleum Corp. v. Superior Court, 366 U.S. 656, 662, 81 S.Ct. 1303, 6 L.Ed.2d 584 (1961) (exclusive federal jurisdiction granted under Natural Gas Act does not preclude state court adjudication of defenses based thereon); Hampton House Management Corp. v. Saleh, 357 F.Supp. 591, 593 (S.D.N.Y.1973) (exclusive federal jurisdiction conferred by Economic Stabilization Act does not prohibit state decision of defenses raised under the Act). The stay expressly excluded Calvert's 1934 Act claim for damages, since jurisdiction over claims for affirmative relief under the Act is exclusively vested in the federal courts and, in any event, Calvert had not pled the 1934 Act in support of its state counterclaim for damages.

On May 9, 1975, Judge Will, who had invited the Judge in the state action to sit with him, heard oral argument on the question of whether a participatory interest in a reinsurance pool constituted a "security" under the definition of that term in the 1933 and 1934 Acts. On June 16, 1975, the state judge ⁷ handed down an order deciding that question in the negative. At that point, and not before, Judge Will apparently decided informally on his own motion to postpone decision on the federal security question.

Calvert applied to this court for a writ of mandamus seeking (1) a reversal of Judge Will's order of May 6, 1975 to the extent it stayed Calvert's 1934 Act claim for rescission and (2) an order compelling Judge Will to rule immediately on the 1934 Act claim for damages. We granted the writ, not finding the "exceptional circumstances" which, under Colorado River, supra, would allow federal court deferral to a parallel state court proceeding for reasons of "wise judicial administration." As we thought that Judge Will's decision to stay had been correct under our pre-Colorado River decision in Aetna State Bank v. Altheimer, supra, we overruled that case. Calvert Fire Ins. Co. v. Will, 560 F.2d 792 (7th Cir. 1977).

The Supreme Court, in a 4-4-1 opinion, reversed our mandamus order. Justice Rehnquist, speaking for four of the five justices voting for reversal, addressed only the propriety of staying the 1934 Act rescission claim, which was concurrently before the state court. He held that mandamus was appropriate only where there was a "clear and indisputable" right to the writ, which he could not find here since, in his view, district judges possess a discretionary power to stay a matter concurrently before a state court. Will v. Calvert Fire Ins. Co., 437 U.S. 655, 662, 665, 98 S.Ct. 2552, 57 L.Ed.2d 504 (1978). He did not address the issue of Judge Will's failure to rule on the 1934 Act damage claim (which was the only claim within the federal courts' exclusive jurisdiction) because he found nothing in the record to indicate that Judge Will's delay in ruling on the damage claim was due to anything more than the normal heavy workload of the federal district courts. Id. at 666-667, 98 S.Ct. 2552.

Justice Blackmun provided the swing vote for reversal on the limited ground that our grant of the writ of mandamus had been premature in light of the fact that Colorado River had not been decided at the time Judge Will made his original decision to stay, and that we should have done no more than remand to Judge Will for reconsideration of his decision in light of Colorado River.

On remand to this Court, we were faced with the task of interpreting the position of a majority of the Justices. We concluded that Judge Will should be afforded the opportunity of reevaluating his decision to stay in light of Colorado River. Calvert Fire Insurance Co. v. Will, 586 F.2d 12 (7th Cir. 1978).

In his subsequent decision, which is the one now under review, Judge Will made it clear that he had also deliberately stayed decision on the 1934 Act damage claim and that postponement of decision on that claim had not been due to the normal heavy workload of the court, as Justice Rehnquist had postulated. However, he explained his stay of the damage claim by pointing out that Calvert had admitted in oral argument before the Supreme Court that it had no claim for damages against Amreco since it had paid nothing into the pool and rescission would therefore make it whole. ⁸ Thus dismissing Calvert's only claim to the exclusive jurisdiction of the federal courts, Judge Will concluded that continuing the stay of Calvert's concurrent claims was justified since Calvert had already obtained an adjudication of all its federal securities claims from the state court and he could only conclude that its continuing quest for a federal readjudication of the same security issue was a delaying tactic. ⁹ Calvert Fire Insurance Co. v. American Mutual Reinsurance Co., 459 F.Supp. 859 (N.D.Ill.1978).

Judge Will did not think that a stay postponing decision of a vexatious federal suit was inconsistent with Colorado River since that case recognized a discretionary power to dismiss federal question suits for reasons of wise...