Todd v. Richmond
| Decision Date | 26 January 1994 |
| Docket Number | No. 94-4001-SAC.,94-4001-SAC. |
| Citation | 844 F. Supp. 1422 |
| Parties | Ron TODD, Commissioner of Insurance, Insurance Department of Kansas, as Liquidator for National Colonial Insurance Company, Plaintiff, v. Murray RICHMOND, in his capacity as Trustee of certain Trusts, Defendant. |
| Court | U.S. District Court — District of Kansas |
Miriam Glueck, Polsinelli, White, Vardeman & Shalton, Overland Park, KS, Frank A. Caro, Jr., Richard H. Ralston, Mary Jo Shaney, Polsinelli, White, Vardeman & Shalton, Kansas City, MO, for plaintiff.
Stephen M. Kerwick, Carol A. Beier, Foulston & Siefkin, Wichita, KS, James L. Grimes, Jr., Foulston & Siefkin, Topeka, KS, Steven A. Berger, Berger, Stern & Webb, New York City, for defendant.
The case comes before the court on the plaintiff's motion to remand and request for expedited decision (Dk. 7). The issue is whether the Burford1 doctrine compels this court to abstain from granting equitable relief in a suit by the liquidator of an insolvent insurer to determine potential liability exposure and to recover assets. At a telephone conference held January 12, 1994, the court set filing deadlines for the defendant's response to the motion and for the court's order on it. With the filing of this order today, both deadlines are met. On the morning of January 26, 1994, approximately 8:30 a.m., the court was faxed the plaintiff's reply brief, and it has read and considered the additional arguments submitted in that pleading.
The plaintiff is the Kansas Commissioner of Insurance. He is the court-ordered liquidator of National Colonial Insurance Company ("NCIC"). The defendant is a New York attorney and trustee of certain New York trusts.
DSN Dealer Service Network, Inc. ("DSN"), a Delaware corporation, created the trusts which are the subject of this suit. DSN's business was to sell and administer extended warranty service contracts for itself and other groups.2 These contracts were sold by automobile and marine dealers and provided the purchasers with warranty coverage supplemental to the manufacturer's original warranty. The dealers collected the payments on the warranty service contracts. These sums covered administrative fees and insurance premiums and the rest was deposited into irrevocable trusts created by DSN and governed by trust agreements. The trust funds have been used to reimburse dealers for claims made on the service contracts. Over the years, DSN has created or contributed to at least fourteen trusts.
The trust agreements and the administration agreements with the dealer groups obligate DSN or its affiliate to obtain insurance to "guarantee" that if the trust funds were depleted then the insurer would reimburse the dealer for losses on the service contracts. In 1988, DSN, through its subsidiary, Colonial Charter Holdings, Inc., purchased NCIC, a Kansas domestic stock property, casualty and fire company. That same year, Richmond authorized loans to DSN from the program trusts totalling $11.5 million for the purchase of NCIC. DSN used NCIC to insure some of its extended warranty service contract programs. In September of 1991, Richmond authorized another loan of $3.1 million to DSN as additional capital for NCIC.
On July 16, 1993, the District Court of Shawnee County, Kansas entered an agreed order of liquidation and a finding of insolvency as to NCIC. . The order appointed the Kansas Insurance Commissioner, Ron Todd, to liquidate NCIC and to take immediate possession of NCIC's property, business and affairs for the transaction of business, to liquidate the business and affairs pursuant to K.S.A.1992 Supp. 40-3605 et seq., and to take such other action as the case and interests may require. As liquidator, Ron Todd also was vested with title to all property, assets, contracts and rights of action of NCIC; was authorized to deal as liquidator with regard to them; and was authorized to sue and defend for NCIC or for the benefit of its policyholders, stockholders and creditors "in the courts and tribunals, agencies or arbitration panels of this state and other states...." . The order further required NCIC branch offices, DSN and all banks or other companies, having in their possession assets, unearned commissions, property or records of NCIC, to turn over immediate possession of them to the liquidator.
On January 3, 1994, Ron Todd as liquidator for NCIC filed in Shawnee County District Court an action against Murray Richmond as trustee of certain trusts existing under DSN's extended service warranty programs. In the verified petition, the plaintiff alleges that the trustee had made or allowed unauthorized and/or uncollateralized loans of trust funds, had commingled or allowed the commingling of trust funds, and had caused or allowed trust funds to become insufficient by reason of this unauthorized use of funds. The specifics of these misuse allegations are not relevant here. The plaintiff further alleges that the trustee has not cooperated with the liquidator and delivered possession of NCIC's property, including assets and records, or provided the requested financial information. The plaintiff contends that the trustee owes a fiduciary duty to NCIC as an intended beneficiary of the trust agreements.
The plaintiff alleges that if the trust funds prove inadequate to cover claims under existing service contracts, the risk of which may have been increased through the trustee's alleged mismanagement of the trusts, then NCIC's exposure to liability is likewise increased. From the court's view, this is the only damage theory alleged in the plaintiff's complaint.3 The plaintiff argues that proof of claims under service contracts have been filed directly against NCIC in the liquidation proceeding and that in California such claims may and have been made directly against NCIC.4
On the same day that the verified petition was filed, the plaintiff obtained a restraining order from the Shawnee County District Court. By this order, the state court found that the risk of an immediate and irreparable injury to the plaintiff existed because of the defendant withholding documents and information, loaning unauthorized amounts from the trust funds, commingling trust funds, using and transferring unauthorized amounts from the trust funds, and acting so as to jeopardize the plaintiff's ability to secure interests in trust assets and claims of the plaintiff's policyholders. The state court ordered that the trustee was not to disburse any funds in any manner inconsistent with the trust agreements, was to make weekly written reports to the court identifying disbursements from trust funds, and was to refrain from withholding the various financial information concerning the trusts that the plaintiff had requested. The state court also set a hearing on the plaintiff's request for a temporary injunction for January 12, 1994.
On January 6, 1994, the defendant filed its notice of removal (Dk. 1) in federal court alleging diversity jurisdiction. Four days later, the plaintiff filed its motion to remand and request for expedited decision. (Dk. 7). After hearing counsels' arguments at the telephone conference on January 12, 1994, the court extended a modified restraining order for ten days or until January 26, 1994, directed defendant to respond no later than January 20, 1994, and informed the parties that a written order would be filed on January 26, 1994. These rulings were embodied in a written order filed January 25, 1994. (Dk. 18).
The plaintiff moves the court to remand the action on the basis of Burford abstention. Even though abstention is neither a defect in the removal process nor an issue of subject matter jurisdiction, which are the two grounds listed for a remand pursuant to 28 U.S.C. § 1447(c), at least two circuits have found specifically that a district court has the authority to remand on abstention grounds. Melahn v. Pennock Ins., Inc., 965 F.2d 1497, 1501 (8th Cir.1992); Corcoran v. Ardra Ins. Co., 842 F.2d 31, 36-37 (2nd Cir.1988). The Tenth Circuit has reversed a district court for not abstaining and remanding a removal case. Grimes v. Crown Life Ins. Co., 857 F.2d 699, 700, 706 (10th Cir. 1988), cert. denied, 489 U.S. 1096, 109 S.Ct. 1568, 103 L.Ed.2d 934 (1989). The court accepts that it has the authority to remand a case on abstention grounds and now must decide if it should. The proponent of Burford abstention has the burden to prove that the circumstances require the court's abstention. Melahn, 965 F.2d at 1507; Property & Cas. Ins. v. Central Nat. Ins., 936 F.2d 319, 326 (7th Cir.1991).
Federal courts have a "virtually unflagging obligation ... to exercise the jurisdiction given them." Colorado River Water Conserv. Dist. v. United States, 424 U.S. 800, 817, 96 S.Ct. 1236, 1246, 47 L.Ed.2d 483 (1976). There are certain cases, however, where a federal court has the discretion to abstain from granting equitable relief because it would unduly interfere with state matters. New Orleans Public Service, Inc. (NOPSI) v. Council of City of New Orleans, 491 U.S. 350, 359, 109 S.Ct. 2506, 2513, 105 L.Ed.2d 298 (1989). Abstention is not the rule but the exception, and it is an "extraordinary and narrow exception to the duty of a District Court to adjudicate a controversy properly before it." Colorado River, 424 U.S. at 813, 96 S.Ct. at 1244. Though a concept that sounds far-reaching, abstention is "justified ... only in exceptional circumstances." Id. The Supreme Court has "carefully defined" the instances when abstention is proper. NOPSI, 491 U.S. at 359, 109 S.Ct. at 2513.
Of the four recognized types of abstention,5 the only one now before the court is Burford abstention. In Burford, the oil company brought a diversity action in federal court attacking a drilling permit order of the Texas Railroad Commission as invalid under state law and in violation of federal due process...
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Todd v. DSN Dealer Service Network, Inc.
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Todd v. Richmond
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