Morgan Stanley Mortg. Capital Inc. v. Insurance Com'r of State of Cal.

• Decision Date: 10 March 1994
• Docket Number: No. 92-55261,92-55261
• Citation: 18 F.3d 790
• Parties: Bankr. L. Rep. P 75,755 MORGAN STANLEY MORTGAGE CAPITAL INC., Plaintiff-Counterdefendant-Appellant, v. INSURANCE COMMISSIONER OF the STATE OF CALIFORNIA, Intervenor-Appellee, and Signature Group, a California Limited Partnership, Defendant-Counterclaimant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 790

18 F.3d 790

Bankr. L. Rep. P 75,755

MORGAN STANLEY MORTGAGE CAPITAL INC. Plaintiff-Counterdefendant-Appellant, v. INSURANCE COMMISSIONER OF the STATE OF CALIFORNIA, Intervenor-Appellee and Signature Group, a California Limited Partnership Defendant-Counterclaimant-Appellee.

No. 92-55261.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Aug. 6, 1993.

Decided March 10, 1994.

Alexander F. Wiles, Evan A. Jenness, Christopher S. Harman, Irell & Manella, Los Angeles, California, for the plaintiff-counterdefendant-appellant.

Karl L. Rubinstein, Charles S. Bronitsky, Kathleen M. McCain, Rubinstein & Perry, Los Angeles, California, for the intervenor-appellee.

Robert E. McCutcheon, Hastie & Kirschner, Oklahoma City, Oklahoma, for the defendant-counterclaimant-appellee.

Appeal from the United States District Court for the Central District of California.

Before: William A. Norris, Charles Wiggins and Diarmuid F. O'Scannlain, Circuit Judges.

WILLIAM A. NORRIS, Circuit Judge:

Morgan Stanley Mortgage Capital Inc. appeals the dismissal of its diversity action to establish ownership and possession of certain negotiable mortgage notes ("Notes") issued by two California limited partnerships (collectively the "Signature Partnerships"). Morgan Stanley bought these Notes from the Signature Partnerships pursuant to reverse-repurchase transactions in which the Signature Partnerships agreed to buy back the Notes at a later date. The transactions were described by the California Court of Appeal in a related state action as follows:

Formally, Morgan Stanley actually purchased the mortgage notes and was to be the owner of the notes until they were repurchased. However, the arrangement was, in reality and in effect, a secured loan from Morgan Stanley to the Signature Partnerships, for which the mortgage notes constituted the security.

Garamendi v. Executive Life Ins. Co., 17 Cal.App.4th 504, 510-11, 21 Cal.Rptr.2d 578 (2d Dist.1993). When the Signature Partnerships failed to repurchase the Notes as promised, Morgan Stanley sued the partnerships and the custodian of the Notes, Security Pacific National Bank, in district court.

Before Morgan Stanley filed its federal action, a state trial court overseeing the insolvency of Executive Life Insurance Company had already asserted in rem jurisdiction over the Notes as assets of separate entities in which Executive Life had a substantial ownership interest. ¹ Upon motion of the California Insurance Commissioner, as conservator of Executive Life and intervenor in the federal suit, the district court dismissed Morgan Stanley's action in the "interest of judicial economy, under principles of comity, and in deference to ... the Conservation Court's prior assumption of in rem jurisdiction...." Order of January 30, 1992, at 4. ²

On appeal, Morgan Stanley argues that the district court should not have deferred to the in rem jurisdiction of the Conservation Court because of the preemptive effect of federal bankruptcy law. See International Shoe Co. v. Pinkus, 278 U.S. 261, 263-64, 49 S.Ct. 108, 109, 73 L.Ed. 318 (1929). The Commissioner responds that the Bankruptcy Code contains an express exception that preserves state court jurisdiction over the insolvency of domestic insurance companies. See 11 U.S.C. Sec. 109(b)(2) (excluding "a domestic insurance company" as an eligible debtor). But Morgan Stanley counters that this exception does not apply because the Notes are not assets of Executive Life, but of the legally separate Signature Partnerships, and that the partnerships were engaged in the business of investing in real estate, not in selling insurance.

This very set of arguments on federal preemption of the Conservation Court's jurisdiction was presented to the California Court of Appeal in Morgan Stanley's direct appeal of the Conservation Court's exercise of in rem jurisdiction over the Notes. After the initial briefs in this federal appeal were filed, the California Court of Appeal handed down its decision rejecting Morgan Stanley's argument. See Garamendi v. Executive Life Ins. Co., 17 Cal.App.4th 504, 21 Cal.Rptr.2d 578 (2d Dist.1993) ("Executive Life" ). In Executive Life, the court reasoned:

[W]hen an "identity of interest" exists between an insolvent insurance company and a partnership in which the insurance company has a substantial ownership interest, a trial court overseeing the company's insolvency may validly exercise in rem jurisdiction over such partnership's assets where reasonably necessary to promote the insolvent company's rehabilitation.

Id. at 508, 21 Cal.Rptr.2d 578. After reviewing facts specific to the relationship between Executive Life and the Signature Partnerships, the California Court of Appeal ruled that Executive Life had a substantial ownership interest in the Signature Partnerships, that "Morgan Stanley's action against the Signature Partnerships was, in effect, an action against [Executive Life]," and that attachment of the partnerships' assets was "reasonably necessary to a successful rehabilitation of [Executive Life.]" ³ Id. at 522, 21 Cal.Rptr.2d 578. Accordingly, the Court of Appeal held that under the exception for domestic insurance companies in the federal bankruptcy code, 11 U.S.C. Sec. 109(b)(2), and the McCarran-Ferguson Act, 15 U.S.C. Secs. 1011-1015 (1988)--which delegates the "business of insurance" to the states ⁴--the Conservation Court's exercise of jurisdiction over the Notes was not preempted. See id. at 522, 21 Cal.Rptr.2d 578. We hold that the full faith and credit statute, 28 U.S.C. Sec. 1738 (1988), requires us to give preclusive effect to the Court of Appeal's decision. ⁵

Section 1738 "commands a federal court to accept the [preclusion] rules chosen by the State from which the judgment is taken." Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373, 380, 105 S.Ct. 1327, 1332, 84 L.Ed.2d 274 (1985) (quoting Kremer v. Chemical Construction Corp., 456 U.S. 461, 481-82, 102 S.Ct. 1883, 1897-98, 72 L.Ed.2d 262 (1982)). "California applies collateral estoppel when: (1) the issue decided in the prior adjudication is identical to the issue presented in the second action; (2) there was a final judgment on the merits; and (3) the party against whom estoppel is asserted was a party or in privity with a party to the prior adjudication." Hirst v. State of California, 770 F.2d 776, 778 (9th Cir.1985) (citations omitted). The parties do not contest that all three requirements are satisfied here.

Morgan Stanley argues that we should engage in an independent review of the question whether the Conservation Court's exercise of in rem jurisdiction over the Notes was preempted by the Bankruptcy Code. In making this argument, Morgan Stanley relies upon the rule of California preclusion law that a second court may independently review the subject matter jurisdiction of the first court before deciding whether to give the first court's judgment preclusive effect. See Eichman v. Fotomat Corp., 759 F.2d 1434, 1437 (9th Cir.1985).

The problem with this argument is that California law also says that when the first court expressly rules that it has subject matter jurisdiction, the second court's jurisdictional inquiry is limited to the question whether the parties had a full and fair opportunity to be heard in the first court. If they had such an opportunity, as Morgan Stanley did in this case, ⁶ then the first court's ruling--even on the issue of its own jurisdiction--must be given preclusive effect. ⁷ See, e.g., St. Sava Mission Corp. v. Serbian Eastern Orthodox Diocese, 223 Cal.App.3d 1354, 1364, 273 Cal.Rptr. 340 (3d Dist.1990); In re Hart, 165 Cal.App.3d 392, 398, 209 Cal.Rptr. 272 (4th Dist.1984); Craig v. Superior Court, 45 Cal.App.3d 675, 680, 119 Cal.Rptr. 692 (3d Dist.1975). ⁸

Because Morgan Stanley was given a full and fair opportunity to litigate the jurisdictional issue before the California Court of Appeal, and because the California Court of Appeal expressly held that federal bankruptcy law did not preempt the Conservation Court's authority to exercise in rem jurisdiction over the Notes, California courts would give preclusive effect to Executive Life. Under Sec. 1738, so must we. ⁹

Finally, Morgan Stanley urges us to invoke the doctrine of implied partial repeal of the full faith and credit statute as a basis for denying preclusive effect to the California Court of Appeal's decision that the Conservation Court may exercise jurisdiction over the Notes. In Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373, 105 S.Ct. 1327, 84 L.Ed.2d 274 (1985), the Supreme Court identified the relevant inquiry in resolving claims of implied partial repeal of Sec. 1738:

[T]he more general question is whether the concerns underlying a particular grant of exclusive jurisdiction [to federal courts] justify a finding of an implied partial repeal of Sec. 1738. Resolution of this question will depend on the particular federal statute as well as the nature of the claim or issue involved in the subsequent federal action. Our previous decisions indicate that the primary consideration must be the intent of Congress.

Id. at 386, 105 S.Ct. at 1335. ¹⁰

Morgan Stanley's Marrese theory is that the federal interest in preserving exclusive jurisdiction over insolvencies in bankruptcy courts is so compelling that federal courts should sometimes recognize an implied partial repeal of Sec. 1738 when state insolvency courts assert jurisdiction over assets owned by entities that are eligible debtors under the Bankruptcy Code. Morgan Stanley bases this argument on the claim that federal bankruptcy law is an area of "highly important federal policy calling for unified and comprehensive proceedings in federal court." 18 Charles Wright, Arthur Miller & James Cooper, Federal Practice and Procedure, Sec. 4428, at 285 (West 1981) (hereinafter "Wright & Miller").

When we bring Morgan Stanley's Marrese argument into...