Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_08-cv-02558/USCOURTS-caed-2_08-cv-02558-13/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:1332 Diversity-Insurance Contract

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UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

----oo0oo----

DALE M. WALLIS, D.V.M., JAMES

L. WALLIS, and HYGIEIA

BIOLOGICAL LABORATORIES, INC.,

a California Corporation,

Plaintiffs,

 v.

CENTENNIAL INSURANCE COMPANY,

INC., a New York corporation,

ATLANTIC MUTUAL INSURANCE,

CO., INC., a New York

corporation, 

Defendants, /

AND RELATED COUNTERCLAIMS AND

THIRD-PARTY COMPLAINT.

 /

NO. CIV. 08-02558 WBS GGH

MEMORANDUM AND ORDER RE:

MOTION TO STAY

----oo0oo----

Plaintiffs Dale M. Wallis, James L. Wallis, and Hygieia

Biological Laboratories Inc. brought this action against

defendants Centennial Insurance Company, Inc. and Atlantic Mutual

Insurance Co., Inc. alleging breach of insurance contract, breach

of the implied covenant of good faith and fair dealing, and

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breach of fiduciary duty relating to plaintiffs’ professional

liability insurance policy. Defendants now move to stay the

action pursuant to the Orders of Liquidation issued against both

defendants in New York state court.

I. Factual and Procedural Background

Plaintiffs filed this action on October 27, 2008,

alleging damages arising from defendants’ refusal to pay defense

fees and costs in connection with an underlying intellectual

property action. (Docket No. 1). On September 14, 2010, the

Supreme Court of the State of New York executed an “Order of

Rehabilitation of Atlantic Mutual Insurance Company” and an

“Order of Rehabilitation of Centennial Insurance Company.” (Not.

of Rehabilitation Order at 2 (Docket No. 122).) Under the terms

of the Orders, defendants were determined to be insolvent and

consented to the entry of an order of rehabilitation under New

York insurance law. (Id. at 4-12.)

On September 21, 2010, defendants submitted a Notice of

Rehabilitation Order to this court and requested a stay of this

action for 180 days. (Docket No. 122.) On November 23, 2010,

the parties submitted a stipulation providing that the action

should be stayed pursuant to the Rehabilitation Order until March

15, 2011. (Docket No. 123.) On December 7, 2010, the court

issued an Order in furtherance of the stipulation and stayed this

matter until March 15, 2011. (Docket No. 124.)

On April 27, 2011, the Supreme Court of the State of

New York issued Orders of Liquidation for defendants that

supplanted the prior Orders of Rehabilitation of September 16,

2010. (Joint Status Report at 2:15-16 (Docket No. 126).) 

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Paragraphs 6 and 7 of both Orders of Liquidation state that, “All

persons are enjoined and restrained from commencing or

prosecuting any actions” against defendants, and “are enjoined

and restrained from obtaining preferences, judgments, attachments

or other liens, or making any levy” against defendants. (Id.

Exs. 1, 2.)

Pursuant to the court’s October 13, 2011, Order, the

parties filed a Joint Status Report on November 16, 2011. 

(Docket No. 126.) Defendants requested that this case be

permanently enjoined and plaintiffs requested that the matter be

stayed for an additional year. (Id.)

The court held a Status Conference on November 16,

2011. At the Status Conference, the court requested further

briefing on whether it was required to grant the stay in light of

the Ninth Circuit’s holding in Hawthorne Savings F.S.B. v.

Reliance Insurance Co. of Illinois, 421 F.3d 835 (9th Cir. 2005),

amended by 433 F.3d 1089 (9th Cir. 2006). Since the Status

Conference, plaintiffs have retracted their request for a oneyear stay and now request that a stay not be ordered. (Pls.’

Opp’n to Defs.’ Mot. to Stay at 2:4-11 (Docket No. 133).) 

Plaintiffs state that their change of heart occurred because

“Plaintiffs had previously thought a one-year stay was

acceptable, but the Defendants now state in their motion that the

liquidation ‘will likely take years’ making the Plaintiffs’

suggestion of a shorter stay ‘impractical and legally

unsupported.’” (Id. at 2:4-6 (quoting Defs.’ Mot. to Stay at 1

n.1 (Docket No. 130)).)

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II. Discussion

A court may stay proceedings pursuant to a power that

is “incidental to the power inherent in every court to control

the disposition of the cases on its docket with economy of time

and effort for itself, for counsel, and for litigants.” Landis

v. N. Am. Co., 299 U.S. 248, 254 (1936). A district court's

decision to grant or deny a Landis stay is a matter of

discretion. See Dependable Highway Express, Inc. v. Navigators

Ins. Co., 498 F.3d 1059, 1066 (9th Cir. 2007); Rohan ex rel.

Gates v. Woodford, 334 F.3d 803, 817 (9th Cir. 2003). A Landis

stay, however, should not be granted “unless it appears likely

the other proceedings will be concluded within a reasonable time

in relation to the urgency of the claims presented to the court.” 

Leyva v. Certified Grocers of Cal., Inc., 593 F.2d 857, 864 (9th

Cir. 1979). 

In deciding whether to grant a stay the court must

weigh the competing interests of the parties, considering in

particular: (1) the possible damage that may result from the

grant of a stay, (2) the hardship or inequity a party may suffer

in being required to go forward with the case, and (3) the

orderly course of justice. CMAX, Inc. v. Hall, 300 F.2d 265, 268

(9th Cir. 1962) (citing Landis, 299 U.S. at 254-55). The burden

on the party seeking a stay is reduced when the opposing party

will not incur any cognizable damage from the stay. Lockyer v.

Migrant Corp., 398 F.3d 1098, 1112 (9th Cir. 2005). 

Congress has exempted the insurance industry from

virtually all federal regulation, including the federal

bankruptcy laws. See 11 U.S.C. § 109(b)(2)-(3). The Supreme

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Court has affirmed “the supremacy of the States in the realm of

insurance regulation.” U.S. Dept. of the Treasury v. Fabe, 508

U.S. 491, 500 (1993). In an insurance case, therefore, the court

must therefore “decide how a California state court would handle

the legal questions at issue.” Hawthorne Savings, 421 F.3d at

841. 

The Uniform Insurers Liquidation Act (“UILA”) was

drafted by the National Conference of Commissioners on Uniform

State Laws to “resolve some of the complexities of liquidating an

insolvent insurance company with assets in multiple states.” 

Levin v. Nat’l Colonial Ins. Co., 806 N.E.2d 473, 476 (N.Y.

2004). UILA has been enacted in California at Insurance Code

sections 1064.1 through 1064.12. New York, where defendants are

in liquidation proceedings, has also enacted UILA, making it a

reciprocal state under UILA’s provisions. 

In Hawthorne Savings, 421 F.3d 835, the Ninth Circuit

Court of Appeals evaluated the application on UILA in

circumstances similar to those found in this case. The plaintiff

in Hawthorne Savings brought an action against an insurance

company in California state court based on state law claims and

the action was later removed to federal court. Hawthorne

Savings, 421 F.3d at 839. Prior to the completion of the

litigation, liquidation proceedings were commenced in

Pennsylvania state court against the defendant insurance company. 

Id. at 840. The Pennsylvania state court’s order of liquidation

provided that, “All actions, including arbitrations and

mediations, currently pending against Reliance in the courts of

the Commonwealth of Pennsylvania or elsewhere are hereby stayed.” 

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Id. The Ninth Circuit held that, despite the Pennsylvania order,

neither the Full Faith and Credit Clause of the Constitution nor

the Uniform Insurers Liquidation Act (“UILA”), Cal. Ins. Code §

1064.1-.12, required that in personam proceedings against an

insolvent insurance company be stayed. Hawthorne Savings, 421

F.3d at 856. In interpreting UILA’s codification in California,

the court held that “the language [of section 1064.9] suggests

that an ‘action or proceeding’ may be maintained unless it is ‘in

the nature of an attachment, garnishment, or execution.’” Id. at

855 (quoting Cal. Ins. Code § 1064.9). The court further held

that “state courts may never enjoin in personam proceedings in

the federal courts.” Id. at 851.

Defendants argue that Hawthorne Savings is not

controlling in this case because the Ninth Circuit only addressed

the application of California Insurance Code section 1064.9 and

did not address the application of section 1064.5. (Mot. to Stay

at 13:23-26.) California Insurance Code section 1064.9 states

that “[d]uring the pendency of delinquency proceedings in this or

any reciprocal state, no action or proceeding in the nature of an

attachment, garnishment, or execution shall be commenced or

maintained in the courts of this state against the delinquent

insurer or its assets.” Cal. Ins. Code § 1064.9. Section 1064.5

provides that “[i]n a delinquency proceeding in a reciprocal

state against an insurer domiciled in that state, claimants

against such insurer who reside within this state may file claims

either with the ancillary receiver, if any, appointed in this

state, or with the domiciliary receiver.” Id. § 1064.5 (emphasis

added). Defendants interpret section 1064.5 as mandating that,

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once liquidation proceedings have begun, all claims must be

brought to the appropriate receiver and may not be pursued in

court, thus barring the action before this court. Because New

York is a reciprocal state and no receiver has been appointed in

California, defendants argue that all claims against them must be

filed with the receiver in New York.1 

Defendants interpretation of section 1064.5 would, at

best, render section 1064.9 superfluous because it suggests that

all actions, regardless of whether they are in rem or in

personam, must be brought to the receiver, so that the provision

in 1064.9 prohibiting in rem proceedings becomes meaningless. In

order to avoid rendering section 1064.9 superfluous while

accepting defendants’ position that section 1064.5 limits

claimants to bringing claims through the appropriate receivers,

one would have to conclude that section 1064.9 limits the claims

that can be filed with the receivers to in rem claims only. This

interpretation would deprive claimants in the midst of pursuing

in personam actions against an insurance company from ever

recovering on their claims if the insurance company goes into

liquidation. It also suggests that plaintiffs in this case are

ineligible to proceed in New York state court because their claim

is an in personam, not an in rem, claim. This cannot be the

case. 

The more logical interpretation is that section 1064.5

is a permissive statute that allows claimants to file their

1 Plaintiffs have already pursued their alternative

remedy in this case. They appear to have brought their claim

directly to the liquidation receiver in New York. (Defs.’ Mot. to

Stay at 1:12-13.) 

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claims with the receiver, see Cal. Ins. Code § 1064.5 (“claimants

. . . may file claims”) (emphasis added), and that section 1064.9

imposes limits on what type of actions may be filed in court. 

Section 1064.5 thus qualifies as an alternative remedy to

claimants who would prefer to not pursue their in personam action

in court or who are barred from pursuing their in rem action in

court pursuant to section 1064.9. Reading the insurance code as

a whole, the law therefore requires that in rem claims be filed

with the appropriate receiver, but that in personam actions may

either proceed in court or be filed with the receiver. See API,

Inc. Asbestos Settlement Trust v. Atl. Mut. Ins. Co., No. 09-665,

2011 WL 5244669, at *3 (D. Minn. Nov. 2, 2011) (“When reading

[Minnesota’s codification of UILA] as a whole, the Court finds

that the ‘claims’ the Trust must file in New York are in rem

claims.”).

Defendants cite authority from other courts suggesting

that a stay is appropriate in this case. See, e.g., In re Ins.

Affiliates, Inc. v. O'Connor, 522 F. Supp. 703, 706 (D. Colo.

1981); Integrity Ins. Co. v. Martin, 769 F.2d 69, 70 (Nev. 1989);

Vlasaty v. Avco Rent-A-Car Sys., Inc., 304 N.Y.S.2d 118, 120

(N.Y. S. Ct. 1969). But see Mancini v. Ins. Corp. of N.Y., No.

07cv1750, 2010 WL 966825, at *2 (S.D. Cal. Mar. 15, 2010)

(holding that a stay of proceedings is not required); Ins. Corp.

of N.Y. v. H & H Plastering Inc., No. C 07-05214, 2010 WL 476647,

at *4 (N.D. Cal. 2010) (same). These authorities, while

instructive, are not binding on this court. Defendants also

argue that other courts have already applied stays in cases

involving them following the commencement of liquidation

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proceedings. See Van Line Bunkering, Inc. v. Atl. Mut. Ins., No.

10-CV-4460, 2011 WL 611842 (E.D. Pa. Feb. 18, 2011); In re

Asbestos Prods. Liab. Litig. (No. VI), No. 08-76815, 2010 WL

4452320 (E.D. Pa. Nov. 4, 2010).2

 The court in Van Line

Bunkering, however, did not base its decision to stay the action

on the application of UILA’s provisions, but instead exercised

the principles of the abstention doctrine. See Van Lines

Bunkering, 2011 WL 611842 at *9-13. Defendants have not

requested that this court apply the abstention doctrine and the

Ninth Circuit has already addressed the application of the

abstention doctrine in circumstances like these and found that it

is not appropriate. Hawthorne Savings, 421 F.3d at 844-49.

In this case, as in Hawthorne Savings, plaintiffs are

proceeding against defendants in an in personam action. Although

the New York Supreme Court issued an order enjoining cases in

jurisdictions outside New York, this court is not bound by that

order. The Ninth Circuit, interpreting California law, has held

that this court is empowered to make a “determination of in

personam legal rights, as opposed to the enforcement of any

resulting judgment.” Id. at 844. The court is aware of no other

2 Defendants cite to three additional cases in which

claims against defendants have been stayed following the start of

liquidation proceedings. However, these decisions do not appear

on either Westlaw or Lexis and only the third case was provided

to the court. The first case appears to be an action in front of

the New Jersey Department of Labor and Workforce Development,

(Mot. to Stay at 15:6-9) and not a federal district court. The

second case, Drazen v. Atlantic Mutual, arose in the Northern

District of California. Upon review of the docket in that case,

it appears that the stay order defendants reference in their

motion, (Mot. to Stay at 15:10-12), was one sentence long and

only applied a temporary stay. The parties settled the case

after the stay expired. 

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controlling authority, nor have defendants provided any, that

would require a permanent injunction under these circumstances.

Additionally, defendants’ motion does not give an

estimate of when liquidation proceedings will conclude. Because

it appears that defendants will be in liquidation proceedings for

the foreseeable future, imposing a stay in this action would be

the equivalent of imposing a permanent injunction. The

imposition of a Landis stay would therefore be inappropriate in

this case because the liquidation proceedings will not conclude

in a reasonable timeframe. See Leyva, 593 F.2d at 864. 

Accordingly, the court will deny defendants’ motion to stay the

proceedings.

IT IS THEREFORE ORDERED that defendants’ motion to stay

the proceedings be, and the same hereby is, DENIED.

DATED: January 30, 2012

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