Costle v. Fremont Indem. Co.

• Decision Date: 26 October 1993
• Docket Number: No. 2:93-CV-157.,2:93-CV-157.
• Citation: 839 F. Supp. 265
• Parties: Elizabeth R. COSTLE, Commissioner of Banking, Insurance and Securities of the State of Vermont, Liquidator of Ambassador Insurance Company, Plaintiff, v. FREMONT INDEMNITY COMPANY, Defendant.
• Court: U.S. District Court — District of Vermont

839 F. Supp. 265

Elizabeth R. COSTLE, Commissioner of Banking, Insurance and Securities of the State of Vermont, Liquidator of Ambassador Insurance Company, Plaintiff, v. FREMONT INDEMNITY COMPANY, Defendant.

No. 2:93-CV-157.

United States District Court, D. Vermont.

October 26, 1993.

COPYRIGHT MATERIAL OMITTED

Richard B. Whitney, Fordham E. Huffman, Jones, Day, Reavis & Pogue, Cleveland, OH, and Jacqueline A. Hughes, Vermont Dept. of Banking, Ins. and Securities, Montpelier, VT, for plaintiff.

John T. Sartore, Paul, Frank & Collins, Inc., Burlington, VT, and Steven C. Schwartz, Buchalter, Nemer, Fields & Younger, New York City, for defendant.

OPINION AND ORDER

PARKER, Chief Judge.

This is a commercial collection action instituted by the liquidator of a domestic insolvent insurance company against its out-of-state reinsurer for proceeds allegedly due under several reinsurance contracts. The lawsuit was originally brought in state court, but was removed by the defendants on the basis of diversity jurisdiction. Shortly after removal, defendants moved to stay the action in favor of arbitration. Plaintiff, however, seeks to have the case remanded to state court under the Burford abstention doctrine. In the alternative, plaintiff opposes the stay. The defendant opposes remand.

I. BACKGROUND

Ambassador Insurance Company ("Ambassador") is a property and casualty insurance company domiciled in Vermont. In November 1983, the Commissioner of Banking and Insurance ("Commissioner") sought an injunction in Washington County Superior Court against further transactions of business by Ambassador pursuant to the Commissioner's powers under the then-existing state statutes governing reorganization and receivership of insurance companies. See Vt. Stat.Ann. tit. 8, §§ 3591-3599 (1984) (repealed 1991).¹ Ambassador agreed that the company was in hazardous financial condition and filed a stipulated order to that effect in the superior court. The court thereafter appointed the Commissioner as receiver of Ambassador and directed the Commissioner to determine whether the company could be rehabilitated or whether it should be liquidated.

On March 30, 1984, after concluding that rehabilitation was not a viable alternative for Ambassador, the Commissioner sought an order for liquidation. Following a lengthy trial on the matter, the court ordered liquidation based on its finding that Ambassador was insolvent and could not be rehabilitated. The court specifically found that as of March 31, 1984, Ambassador was insolvent in an amount exceeding 45 million dollars. By way of a Liquidation Order filed March 10, 1987, the court then terminated the rehabilitation of Ambassador and appointed the Commissioner as Liquidator of Ambassador ("the Liquidator"), authorizing her to take possession of the assets of the company and to administer them under the court's supervision.

The terms of the March 10, 1987 Liquidation Order vested all title to all property and assets of Ambassador in the Liquidator and enumerated the Liquidator's duties and powers. Those powers include, among others, the power to:

(e) to collect all debts and moneys due and claims belonging to Ambassador, wherever located, and for this purpose:

(i) to institute timely action in other jurisdictions, in order to forestall garnishment and attachment proceedings against such debts;

(ii) to do such other acts as are necessary or expedient to collect, conserve or protect its assets or property, including the power to sell, compound, compromise, or assign debts for purposes of collection upon such terms and conditions as he deems appropriate; and

(iii) to pursue any creditor's remedies available to enforce his claims; ...

(j) subject to the provisions of paragraph 11(k) hereof, to institute and to prosecute, in the name of Ambassador or in his own name, any and all suits and other legal proceedings, to defend suits in which Ambassador or the Liquidator is a party, in this state or elsewhere, whether or not such suits are pending as of the date of this Order, to abandon the prosecution or defense of suits, legal proceedings and claims which he deems inappropriate to pursue further and to settle suits, legal proceedings or claims on such terms and conditions as he deems appropriate;

(k) advance approval by the Court shall be required in any case in which the Liquidator seeks to abandon the prosecution of any claim, or to settle any claim, which the Liquidator has asserted to have a value in excess of One Million Dollars ($1,000,000); ...

In re Ambassador Ins. Co., Inc., No. S-444-83 Wnc (Wash.Super.Ct. filed March 10, 1987) (Liquidation Order) (Paper 16, Exhibit A at 4-7).

Pursuant to those powers, the Liquidator commenced this action in Washington Superior Court on April 23, 1993. The Complaint states that beginning in 1978, Ambassador and the defendant, Fremont Indemnity Company ("Fremont"), entered into a series of excess of loss reinsurance contracts. Fremont is a corporation incorporated in California and having its principal place of business there; Fremont is also licensed as a reinsurer in Vermont. The contracts between Ambassador and Fremont contain an insolvency clause that requires Fremont, in the event that Ambassador is placed in liquidation, to tender reinsurance payments on account of incurred losses to the Liquidator of Ambassador. The Liquidator alleges that the Ambassador estate has paid claims made against the insurance policies that were reinsured by Ambassador with Fremont, and that Fremont has failed and refused to pay its reinsurance obligations despite a demand for payment. Claiming breach of contract, the Liquidator seeks damages in an amount not less than $3,500,000. Prior to removal, the Liquidator requested, by way of a motion filed in the superior court, that this case be assigned to a receivership judge.

Fremont timely filed its Notice of Removal, alleging diversity jurisdiction pursuant to 28 U.S.C. § 1332 and removal pursuant to 28 U.S.C. § 1441(a). There is no question that removal was proper. On June 2, 1993, Fremont answered the Complaint, acknowledging and identifying its contracts with Ambassador, but denying the allegations of breach of contract. Fremont asserted a number of affirmative defenses, among them, its right to arbitration pursuant to the arbitration clauses in each of its contracts with Ambassador. Accompanying its Answer, Fremont filed a motion to stay the action in favor of arbitration.

On June 23, 1993, the Liquidator moved to remand the action, asking the Court to abstain from exercising its jurisdiction over this case "in consideration of the strong interest of the State of Vermont in the consistent administration of its regulatory scheme for the liquidation of insolvent insurance companies." (Memorandum in Support of Motion to Remand, Paper 16 at 4). Invoking the abstention doctrine enunciated in Burford v. Sun Oil Co., 319 U.S. 315, 63 S.Ct. 1098, 87 L.Ed. 1424 (1943), and its progeny, the Liquidator pursues a means for returning to the forum of its choosing. The Liquidator argues that the McCarran-Ferguson Act, 15 U.S.C. §§ 1011-1015 (1976), which evinces the clear intent of Congress to leave the regulation of the business of insurance to the states, makes the Burford analysis a "reflexive inquiry" in any insurance regulation matter brought in federal court. Moreover, the Liquidator argues, where a state has created a comprehensive scheme for liquidating insolvent insurance companies, federal courts routinely abstain from cases involving matters relating to the administration of an insolvent insurer's estate.

Finally, the Liquidator urges the Court to decide the motion for remand before addressing Fremont's motion for a stay, arguing that the issues require separate, independent inquiries. In effect, the Liquidator is arguing that in the context of this case, the removal statute, 28 U.S.C. § 1441, is inconsistent with federal policies underlying the McCarran-Ferguson Act; and further, removal in this case impairs state laws regulating the business of insurance. Under the Liquidator's analysis, a decision to abstain can be reached without resort to the issue of the application of the Federal Arbitration Act.

Fremont, on the other hand, contends that a defense of its rights under the Federal Arbitration Act has created a federal question so entangled with the state law issues presented in the case that remand is inappropriate. The Court agrees with the plaintiff that the remand issue can be determined without a discussion of the Federal Arbitration Act, 9 U.S.C. §§ 1-16 (1970 & Supp. 1993).

II. REMAND

The linchpin of the Liquidator's argument in support of remand is her construction of Vermont's statutory laws on liquidation of insolvent insurers as a "regulation of the business of insurance." If the insolvency laws are seen as regulating the business of insurance, they fall within the category of state laws Congress sought to preserve as preeminent under the McCarran-Ferguson Act. That Act limits the effect of federal legislation on state regulatory action over insurance companies. 15 U.S.C. § 1012(b). Likewise, the Liquidator seems to be arguing, the McCarran-Ferguson Act, via the Burford abstention doctrine, requires federal courts to abdicate federal jurisdiction when confronted with questions related to a state scheme regulating insurance companies.

As discussed below, however, the Court need not reach the merits of this argument because the Liquidator has failed to demonstrate that this case satisfies three basic elements of the Burford abstention doctrine.

The Burford Abstention Doctrine

Federal courts are courts of limited jurisdiction with their bounds defined by Congress. U.S. Const. art. III. Within these limits however, federal courts have an "unflagging obligation" to exercise the jurisdiction given them to adjudicate controversies. Law Enforcement Ins. Co., Ltd. v. Corcoran, 807 F.2d 38, 39 (2d...