Dykhouse v. Corporate Risk Management Corp.

• Decision Date: 08 May 1992
• Docket Number: No. 91-1646,91-1646
• Citation: 961 F.2d 1576
• Parties: NOTICE: Sixth Circuit Rule 24(c) states that citation of unpublished dispositions is disfavored except for establishing res judicata, estoppel, or the law of the case and requires service of copies of cited unpublished dispositions of the Sixth Circuit. David J. DYKHOUSE, Commissioner of Insurance, as Receiver/Liquidator for Cadillac Insurance Company in Liquidation, Plaintiff-Appellee, v. CORPORATE RISK MANAGEMENT CORPORATION, MIH Consultants, and Martin Hoffman, Defendants-Appellants.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 1576

961 F.2d 1576

NOTICE: Sixth Circuit Rule 24(c) states that citation of unpublished dispositions is disfavored except for establishing res judicata, estoppel, or the law of the case and requires service of copies of cited unpublished dispositions of the Sixth Circuit.

David J. DYKHOUSE, Commissioner of Insurance, as Receiver/Liquidator for Cadillac Insurance Company in Liquidation, Plaintiff-Appellee, v. CORPORATE RISK MANAGEMENT CORPORATION, MIH Consultants, and Martin Hoffman, Defendants-Appellants.

No. 91-1646.

United States Court of Appeals, Sixth Circuit.

May 8, 1992.

Before RALPH B. GUY Jr. and BATCHELDER, Circuit Judges, and SPIEGEL, District Judge. ^*

PER CURIAM.

In this diversity action, defendants-appellants, Corporate Risk Management Corporation, MIH Consultants, and Martin Hoffman (collectively "CRM"), appeal the district court's dismissal of their counterclaims against plaintiff-appellee, David Dykhouse, Commissioner of Insurance ("Commissioner"), as Receiver/Liquidator for Cadillac Insurance Company ("Cadillac") in Liquidation. Although we agree that the district court should not have adjudicated the counterclaims, we reverse the dismissal of the counterclaims and remand to enable the district court to abstain, under the Burford abstention doctrine, from adjudicating these counterclaims and to remand them to state court.

I.

In 1988 and 1989, CRM, ¹ acting pursuant to managing general agency agreements as an agent for Cadillac, agreed to procure insurance business for Cadillac. As Cadillac's agent, CRM wrote policies, collected premiums, and paid claims on the policies. On July 7, 1989, Cadillac was placed into conservatorship by Order of the Michigan Circuit Court for the County of Ingham ("Receivership Court"), and the Acting Commissioner of Insurance was appointed Temporary Conservator of Cadillac. It is alleged that, when Cadillac's financial troubles became apparent in October of 1989, CRM refused to pay claims on policies or to return premiums to policyholders. These actions by CRM are the basis for the Complaint filed by the Acting Commissioner against CRM on October 10, 1989. ²

On November 9, 1989, CRM removed this case to the United States District Court for the Eastern District of Michigan on the basis of diversity of citizenship. On December 1, 1989, CRM filed an answer with counterclaim. On January 2, 1990, the Receivership Court entered an Order Granting Appointment of Permanent Liquidating Receiver, Permanent Injunction, and Related Orders Governing Liquidating Receivership ("Liquidation Order") by which the court placed Cadillac into liquidation and appointed the Acting Commissioner of Insurance as Receiver/Liquidator. On April 2, 1990, the Acting Commissioner filed a copy of the Liquidation Order in the United States District Court and sought a six-month stay of the federal action. The stay was granted on April 24, 1990.

The stay was lifted on July 3, 1990, and CRM filed an Answer to First Amended Complaint, Affirmative Defenses, and Counterclaims ("Second Amended Counterclaims") and Amended Counterclaims, on August 20, 1990, and November 20, 1990, respectively. ³ On December 5, 1990, the Acting Commissioner moved to dismiss CRM's counterclaims. Following briefing by the parties, on January 16, 1991, the Receivership Court entered an Order Amending Nunc Pro Tunc Original Order of Liquidation and Appointment of Commissioner of Insurance as Receiver/Liquidator ("Amended Liquidation Order"). The Amended Liquidation Order enjoined all actions from being "commenced or further prosecuted ..." against Cadillac or the Acting Commissioner of Insurance and enjoined all persons from bringing an action "without first obtaining the authorization of this Court."

On January 17, 1991, the district court held a hearing on the motion to dismiss CRM's counterclaims, at the conclusion of which, the district court stated that it was prepared to dismiss the counterclaims, and on January 25, 1991, an Order was entered dismissing the counterclaims as being contrary to the Amended Liquidation Order and to Michigan law and public policy. On May 9, 1991, the district court entered an Order granting CRM's motion for certification pursuant to Fed.R.Civ.P. 54(b).

II.

CRM first argues that under Michigan statutory and case law, because the counterclaims were filed before the conservatorship had been transformed by court order into a receivership, permission of the Receivership Court was not required prior to filing counterclaims. Second, CRM argues that an insurance agent has a right of setoff against an insurance company, thus entitling agents, including CRM, to obtain a preference as against creditors involved in the liquidation proceeding. Finally, CRM emphasizes that, although Chapter 81 of the Michigan Insurance Code would bar CRM's counterclaims without permission of the Receivership Court, Chapter 81 did not take effect until after CRM went into delinquency proceedings and is, therefore, inapplicable.

The Commissioner claims that the McCarran-Ferguson Act, 15 U.S.C. Sections 1011-12, ⁴ together with the Michigan insurance statutes and case law, divested the district court of subject-matter jurisdiction. Alternatively, he argues that even if the district court had jurisdiction, the abstention doctrine set forth by the United States Supreme Court in Burford v. Sun Oil Co., 319 U.S. 315 (1943), required it to abstain from exercising that jurisdiction. Next, the Commissioner argues that Michigan case law and statutory law, the Receivership Court Order, and public policy prohibit the continued prosecution of CRM's counterclaims. Finally, he contends that CRM has waived its right to raise a claim for setoff against any claims made by the Commissioner ⁵ or, alternatively, that there is no right of an insurance agent holding premiums in trust to obtain a preferential right to setoff against an insolvent insurer.

We address first the issue of whether the district court should have abstained, under the Burford abstention doctrine, from adjudicating CRM's counterclaims. We hold that the district court should have abstained. ⁶

At the January 17, 1991, hearing on the Commissioner's motion to dismiss the counterclaims, the district court indicated that it was dismissing the counterclaims because it believed a Michigan court would do so under the circumstances, because not to do so would frustrate the Michigan statutory insurance scheme, ⁷ and because to dismiss was consistent with the Amended Liquidation Order entered by the Receivership Court the previous day. The district court's January 25, 1991, Amended Order simply referenced the reasons given at the earlier hearing. However, in its May 9, 1991, Order granting Rule 54(b) certification, ⁸ the district court stated that, "[b]ased upon the order of the [Receivership Court], this court granted plaintiff's motion and dismissed defendants' counterclaims for lack of jurisdiction " (emphasis added). It is thus unclear whether the district court dismissed the counterclaims on the basis of a perceived lack of jurisdiction ⁹ or on discretionary grounds.

We hold that the district court was correct in declining to proceed on CRM's counterclaims; however, for the reasons set forth below, we find that the court should have abstained from exercising its jurisdiction and remanded the counterclaims to the state court. ¹⁰

The Burford abstention doctrine originated with the case of Burford v. Sun Oil Co. In Burford, the Supreme Court held that it was proper for a federal court to abstain from deciding a case that involved "Texas' complex oil and gas regulations." New Orleans Pub. Serv., Inc. v. Council of New Orleans, 491 U.S. 350, 360 (1989) ("NOPSI "). In NOPSI, the Supreme Court recently and succinctly set forth the two situations in which Burford abstention would be appropriate:

Where timely and adequate state-court review is available, a federal court sitting in equity must decline to interfere with the proceedings or orders of state administrative agencies: (1) when there are "difficult questions of state law bearing on policy problems of substantial public import whose importance transcends the result in the case then at bar"; or (2) where the "exercise of federal review of the question in a case and in similar cases would be disruptive of state efforts to establish a coherent policy with respect to a matter of substantial public concern." Colorado River Water Conservation Dist. v. United States, supra, at 814.

NOPSI, 491 U.S. at 361.

This court implicitly has recognized, in dicta, that Burford abstention is appropriate to avoid "considering questions regarding state liquidation proceedings in order to protect the state's substantial interests in this regard," provided that no direct federal question is involved. Fabe, 939 F.2d at 347. In addition, the Second, Third, Fifth, Seventh, and Tenth Circuits all have held Burford abstention appropriate in cases involving analogous state insurance company liquidation proceedings. ¹¹

One court has identified the following factors as relevant to a determination of whether Burford abstention is appropriate in a given case: 1) whether the cause of action is exclusively federal; 2) "whether the suit requires the court to determine issues which are directly relevant to the liquidation proceeding or state policy in the regulation of the insurance industry ...;" 3) "whether state procedures indicate a desire to create special state forums to regulate and adjudicate these issues ...;" and 4) "whether difficult or unusual state laws are at issue...." Grimes, 857 F.2d at 704-05.

We conclude that both the Supreme Court's articulation in NOPSI of the rationale behind Burford and the Tenth Circuit's four-factor test in Grimes point to abstention in the present case. First, all the counterclaims in this diversity action are based on state law. Second, a determination by the district court that CRM is entitled to...