Koken v. Cologne Reinsurance (Barbados), Ltd.

• Decision Date: 26 January 1999
• Docket Number: No. CIV. A. 1:CV-98-0678.,CIV. A. 1:CV-98-0678.
• Parties: M. Diane KOKEN, Commissioner of Insurance for the Commonwealth of Pennsylvania, as Liquidator of American Integrity Insurance Company, Plaintiff, v. COLOGNE REINSURANCE (BARBADOS), LTD., Defendant.
• Court: U.S. District Court — Middle District of Pennsylvania

34 F.Supp.2d 240

M. Diane KOKEN, Commissioner of Insurance for the Commonwealth of Pennsylvania, as Liquidator of American Integrity Insurance Company, Plaintiff, v. COLOGNE REINSURANCE (BARBADOS), LTD., Defendant.

No. CIV. A. 1:CV-98-0678.

United States District Court, M.D. Pennsylvania.

January 26, 1999.

COPYRIGHT MATERIAL OMITTED

William F. Costigan, Costigan Hargraves & McConnell, P.C., New York City, for M. Diane Koken.

Vincent J. Vitkowsky, Peter T. Maloney, Marc Santa Maria, Edwards & Angell, New York City, Michael J. Glasheen, McCarter & English, Philadelphia, PA, for Cologne Reinsurance (Barbados), Ltd.

MEMORANDUM

CALDWELL, District Judge.

I. Introduction.

M. Diane Koken, the insurance commissioner of the Commonwealth of Pennsylvania, filed this lawsuit in the Pennsylvania Commonwealth Court as the statutory liquidator of American Integrity Insurance Co., seeking damages and declaratory relief against Cologne Reinsurance (Barbados), Ltd. The suit arises from a reinsurance agreement American Integrity had with Cologne.

Cologne removed the case here on the bases of federal-question and diversity jurisdiction. We are considering two motions: (1) the Liquidator's motion to remand to state court, and (2) Cologne's motion to stay the action and compel arbitration.

II. Background.

Defendant Cologne is a Barbados corporation engaged in the business of reinsurance; it accepts a transfer of risk from other insurance companies on policies the latter have issued. American Integrity, the subject of the liquidation, was a fire and casualty insurance company with its principal offices in Pennsylvania.

In 1990, Cologne and American Integrity entered into a reinsurance agreement to be effective April 1, 1990. For our purposes, we need only note that Cologne provided the reinsurance under a Coinsurance Agreement by which it accepted a portion of liability on each American Integrity policy. (Elgee affidavit on stay and arbitration, ¶ 3). The agreement contained a setoff clause, allowing one party to use the debt owing by the other to reduce its own debt to the other. The clause read as follows:

Upon notice to the other party, the Company or the Reinsurer may offset any balance(s) owed to it by the other party, from premiums, allowances, claims, losses, loss adjustment expenses, or other amount(s) due from one party to the other under this Agreement.

(Exhibit A to Elgee affidavit, Article V to the Coinsurance Agreement).

In June 1992, American Integrity and Cologne executed "Amendment 3" to the Agreement, allowing American Integrity to withhold payments due to Cologne under the Coinsurance Agreement as security for Cologne's performance of the Agreement. In return, Cologne could require American Integrity to establish a trust account (the "Trust Account") in which the withheld funds would be placed. The Trust Account was established at First Fidelity Bank.

In December 1992, the Coinsurance Agreement was amended again by "Amendment 5." According to the Liquidator, Amendment 5 broadened the reinsurance to more types of American Integrity policies and increased the percentage of the reinsurance. At the same time, Cologne and American Integrity executed a Stop Loss Agreement by which American Integrity reinsured Cologne for some of the reinsurance Cologne had provided American Integrity. Additionally, the setoff provision of the Coinsurance Agreement was modified to allow the setoff of any debts between the parties, not just on the Coinsurance Agreement. In pertinent part, the setoff clause now read as follows:

Upon notice to the other party, the Company or the Reinsurer may offset any balance(s) owed to it by the other party, from premiums, allowances, claims, losses, loss adjustment expenses, or other amount(s) due from one party to the other ....

(Exhibit A to Elgee affidavit, Article V of Amendment 5 to the Coinsurance Agreement). As noted, the original offset language finished this clause with the phrase "under this agreement." (Id., original Article V to the Coinsurance Agreement). (According to the Liquidator, the modification allowed Cologne to setoff amounts it owed American Integrity under the Coinsurance Agreement by amounts American Integrity owed it under the Stop Loss Agreement.)

Amendment 5, like the original Coinsurance Agreement, also contained an arbitration provision. In relevant part, the arbitration provision in Amendment 5 reads as follows:

All disputes and differences between the Company and the Reinsurer on which an amicable understanding cannot be reached shall be decided by arbitration at a site mutually agreed upon by both parties. The following procedures shall apply.

Upon written request of either party ... each party shall choose an arbitrator and the two chosen shall select a third arbitrator All arbitrators shall be active officers of insurance companies and disinterested in the outcome of the arbitration....

....

The arbitrators shall interpret this agreement as an honorable engagement and not merely as a legal obligation; they are relieved of all judicial formalities and may abstain from following the strict rules of law....

(Elgee affidavit, exhibit A, Article XI to amendment 5).

Under Pennsylvania law, Article V of the Insurance Department Act, 40 P.S. §§ 211-221.63 (Purdon & Purdon Supp. 1998-99), governs insurer liquidations and rehabilitations. Pursuant to the Article, the Liquidator petitioned the Pennsylvania Commonwealth Court, the state court that administers liquidation and rehabilitation of insolvent insurers, to put American Integrity into liquidation. On June 25, 1993, the court issued an order of liquidation. Among other things, the order placed all American Integrity assets, including contracts and rights of action, in the control of the Liquidator. It also ordered First Fidelity Bank not to disburse or transfer any funds from the Trust Account unless directed in writing by the Liquidator. According to the Liquidator, the $12 million in the account in June 1993 had grown to over $17 million in December 1997. (Daley affidavit, ¶ 19).

The Liquidator filed this lawsuit in the commonwealth court, alleging that Cologne had failed to make all payments due under the Coinsurance Agreement. The complaint sought the following relief. First, the Liquidator requested damages for breach of the Agreement. Second, she requested declaratory relief that under Pennsylvania insurance law Cologne could not invoke its right of setoff or enforce the Stop Loss Agreement. Third, she requested that the court disburse the Trust Account to her.

According to the Liquidator, Cologne owes about $25 million on the Coinsurance Agreement. This "asset" of the estate compares to only $37 million in American Integrity assets elsewhere, thus making this lawsuit, depending on its outcome, responsible for about 40% of the assets that will be available for American Integrity's creditors.

As noted, Cologne removed the suit here on the bases of diversity jurisdiction and federal-question jurisdiction. The latter basis for jurisdiction is the Federal Arbitration Act, 9 U.S.C. § 1-307; specifically, 9 U.S.C. § 201 which provides that the Convention on the Recognition of Foreign Arbitral Awards shall be enforced in the United States, including the Convention's requirement that arbitration agreements be honored.

III. Discussion.

A. The Liquidator's Motion to Remand.

The Liquidator has moved to remand this action to the commonwealth court on two grounds. First, she contends that the court should abstain from deciding this case and remand it to the commonwealth court under Burford abstention. Alternatively, she asserts we should abstain under Colorado River abstention.

1. Burford Abstention.

In Feige v. Sechrest, 90 F.3d 846, 847 (3d Cir.1996), the Third Circuit stated the standard for abstention under Burford v. Sun Oil Co., 319 U.S. 315, 63 S.Ct. 1098, 87 L.Ed. 1424 (1943). Under Burford abstention, a district court should "decline to interfere with the proceedings or orders of state administrative agencies" when "timely and adequate state-court review is available" and either of the following two criteria is satisfied:

(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."

Feige, 90 F.3d at 847 (quoting Riley v. Simmons, 45 F.3d 764, 771 (3d Cir.1995))(quoting New Orleans Pub. Serv., Inc. v. Council of

New Orleans, 491 U.S. 350, 360-63, 109 S.Ct. 2506, 2514-15, 105 L.Ed.2d 298 (1989)).

Burford abstention originated in cases where the plaintiff was seeking equitable relief, but it has been extended to actions seeking declaratory relief and damages, Quackenbush v. Allstate Insurance Co., 517 U.S. 706, 116 S.Ct. 1712, 135 L.Ed.2d 1 (1996), although for damages only a stay of the action is authorized, not a remand or dismissal. Id.

The Liquidator contends that we should abstain under Burford for the following reasons. To begin with, timely and adequate review is available in the state courts; indeed, the case was removed from the Pennsylvania Commonwealth Court. Next, the first criterion has been satisfied because the case presents three difficult questions of state law bearing on policy problems of substantial public import whose importance transcends the result in the case at bar. She asserts that they are all unsettled and that abstention on all three would allow state courts to decide if arbitrators should be allowed to resolve these important issues. She also emphasizes that the first two of these questions are statutory-liquidation issues, rather than issues merely involving Cologne's contractual rights under the Coinsurance Agreement.

The...