Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_07-cv-05214/USCOURTS-cand-3_07-cv-05214-9/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

For the Northern District of California

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IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

INSURANCE CORPORATION OF

NEW YORK,

Plaintiff,

 v.

H&H PLASTERING INC., CONCRETE

SHELL STRUCTURES, INC., and

DOES 1 through 10, inclusive,

Defendants. /

No. C 07-05214 WHA

ORDER GRANTING

STAY FOR 60 DAYS

INTRODUCTION

In this long-running insurance-contract action, plaintiff Insurance Corporation of New

York seeks reformation of its insurance policies with defendant H&H Plastering Inc. and a

declaration that it not be held responsible for H&H’s legal defense in an underlying arbitration. 

That arbitration began in 2004 but is still unresolved with regards to claims against H&H. H&H

is no longer in business and its former principal has been incapacitated by a serious car accident. 

Codefendant Concrete Shell Structures, Inc. is a dissolved corporation that has assigned all its

rights and claims against H&H and H&H’s insurers (including plaintiff) to third-party intervenor

Britannia Pointe Grand Limited Partnership. In June 2009, plaintiff was placed in rehabilitation

proceedings in New York and a motion to place it in liquidation is pending in New York Supreme

Court.

Case 3:07-cv-05214-WHA Document 96 Filed 02/04/10 Page 1 of 8
United States District Court

For the Northern District of California

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A bench trial is scheduled to begin in this matter on March 1, 2010, and a final pretrial

conference is scheduled for February 8, 2010. Plaintiff now moves to stay this matter

indefinitely, and Britannia has filed a statement of nonopposition to the motion. For the reasons

that follow, this matter will be stayed for 60 days. At that point, plaintiff must choose to either

proceed to trial or abandon this action.

STATEMENT

Commercial property owner Britannia hired general contractor Concrete Shell to construct

a building on one of its properties in San Francisco. Concrete Shell hired H&H as a

subcontractor to install caulk joints and an exterior installation finishing system (“EIFS”) on the

building’s exterior. The work was substantially completed in 1998. Britannia then became aware

of construction defects in the project. In June 2004, Britannia filed an arbitration action against

Concrete Shell. Concrete Shell, in turn, filed a cross-claim in the arbitration against the

subcontractors that had installed the caulk joints and EIFS, which included H&H.

Plaintiff was H&H’s insurer at the time. Although H&H requested, pursuant to its

insurance policy, that plaintiff provide a legal defense against Concrete Shell’s claims in January

2005, plaintiff did not agree to defend H&H — even with a reservation of rights — until June

2007. In October 2007, plaintiff filed the instant action against H&H and Concrete Shell (but not

Britannia) claiming that two of its four insurance policies with H&H mistakenly omitted an EIFS

exclusion which was originally intended by the parties. The alleged omission was not discovered

until after H&H requested legal defense in the Britannia action. In its complaint, plaintiff sought

the following: (1) reformation of the two insurance policies at issue to reflect an EIFS exclusion,

(2) declaratory relief saying that under the reformed insurance policies plaintiff had no duty to

defend H&H against Britannia’s or Concrete Shell’s claims and (3) declaratory relief that plaintiff

had no duty to indemnify H&H for its defense against those claims.

Meanwhile, the Britannia arbitration continued. On January 17, 2008, every party in the

Britannia arbitration except H&H agreed to settle their respective claims against each other. As

part of the settlement, Concrete Shell agreed to assign to Britannia all of Concrete Shell’s rights

and claims against H&H and H&H’s insurers relating to the arbitration. Britannia subsequently

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intervened in this action, assuming all of Concrete Shell’s rights in relation to plaintiff. No

affirmative counterclaims, however, have been asserted against plaintiff in this action. A case

management order on January 28, 2009, set a trial date of March 1, 2010 (Dkt. No. 76).

On June 29, 2009, plaintiff was placed in rehabilitation proceedings in New York as

insolvent. The Superintendent of Insurance of the State of New York was appointed as its

rehabilitator. The order of rehabilitation (Dkt. No 82) stated in pertinent part:

“The officers, directors, shareholders, members, depositories,

trustees, policyholders, agents, servants, employees, attorneys,

managers and affiliates of INSCORP are permanently enjoined and

restrained from: (i) transacting the business of INSCORP; (ii)

wasting or disposing of or permitting to be done any act or thing

that might waste or dispose of INSCORP’s property; and (iii)

interfering with the Rehabilitator in the possession, control and

management of INSCORP’s property or in the discharge of his

duties.”

On December 18, 2009, upon the motion of the rehabilitator, the Supreme Court of the

State of New York, County of New York, issued an order to show cause why an order should not

be made to convert the rehabilitation proceeding into a liquidation proceeding (Dkt. No. 88). 

Counsel for plaintiff has submitted a sworn declaration that on or about January 23, 2010, she

received authorization from the New York Liquidation Bureau — which carries out the duties of

the Superintendent of Insurance of the State of New York as rehabilitator — to request a stay in

the present matter (Fama Decl. at ¶ 5).

ANALYSIS

Plaintiff contends that this matter should be stayed for several reasons. First, it contends

that pursuant to California Insurance Code § 1063.6, all proceedings in which an insolvent insurer

is a party must be stayed for a minimum period of sixty days from the date of an order of

liquidation or rehabilitation is issued by a court in the insurer’s state of domicile. Second, it

argues that full faith and credit should be accorded to the New York court’s rehabilitation order

and that principles of comity require that this matter be stayed. Third, it argues that the

McCarran-Ferguson Act requires a stay of this action so that New York’s regulatory scheme can

regulate the affairs of Inscorp without interference.

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United States District Court

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1. CALIFORNIA INSURANCE CODE § 1063.6.

This lawsuit is a state-law insurance contract claim between private parties. Federal

jurisdiction is grounded solely on the diversity of the parties. Under Erie Railroad Co. v.

Tompkins, 304 U.S. 64 (1938), federal courts sitting in diversity jurisdiction apply state

substantive law and federal procedural law. Freund v. Nycomed Amersham, 347 F.3d 752, 761

(9th Cir. 2003). At the industry’s request, 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 Court has affirmed “the supremacy of the States in the realm of

insurance regulation.” United States Department of the Treasury v. Fabe, 508 U.S. 491, 500

(1993). The parties do not contest the application of state law in resolving this matter. Resolving

the rights of a plaintiff insurance company pursuant to an insurance contract is thus governed by

state substantive law. In other words, “to decide how a California state court would handle the

legal questions at issue” is central to the resolution of this matter. Hawthorne Savings v. Reliance

Ins. Co., 421, F.3d 835, 841 (9th Cir. 2005).

As provided by California Insurance Code § 1063.6, California courts must automatically

stay any legal action in which an insolvent insurer is a party for 60 days after a liquidation order

or receivership is ordered. This stay may be extended “to permit proper defense or conduct” of

the pending action. See Superior Dispatch, Inc. v. Insurance Corp. of New York, 2010 WL

187957 (Cal. App. 2 Dist., Jan. 21, 2010).

In this matter, plaintiff has been slow to assert any right to a stay. Plaintiff was put in

rehabilitation proceedings in June 2009 but did not apply for a stay until seven months later, just

one week before the final pretrial conference. Nevertheless, plaintiff has submitted a sworn

declaration that the excuse for this tardiness is its rehabilitator did not give permission to seek a

stay until January 23. In all events, a stay of 60 days after a receivership is ordered is automatic

under applicable California law. Accordingly, a stay of 60 days is GRANTED.

On the other hand, plaintiff’s application for an indefinite stay of this matter is DENIED. 

While a stay under California Insurance Code § 1063.6 may be extended “to permit proper

defense or conduct” of the pending action, there is no requirement that such an extension be

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granted. Indeed, pursuant to California Insurance Code § 1064.10, “[t]he domiciliary receiver of

an insurer domiciled in a reciprocal state may sue in this state to recover any assets of that insurer

to which he or she may be entitled under the laws of this state.” In other words, no further stay is

required because the Superintendent of Insurance of the State of New York acting as plaintiff’s

rehabilitator (or liquidator) is explicitly empowered to pursue this action on plaintiff’s behalf. As

explained below, none of plaintiff’s other arguments for a stay hold to the contrary.

2. FULL FAITH AND CREDIT AND COMITY.

Plaintiff argues that full faith and credit must be accorded to the stay contained in the

Supreme Court of New York’s rehabilitation order pursuant to Article IV, Section 1 of the United

States Constitution. Under Ninth Circuit precedent, this argument fails both from the perspective

of the obligations owed by the courts of California regarding judgments issued by the New York

court as well as from the perspective of a federal court’s full faith and credit obligation. The New

York court’s rehabilitation and liquidation orders need not be accorded full faith and credit

because there has been no showing that the New York court has personal jurisdiction over

Britannia and because state courts may never enjoin in personam proceedings in federal courts.

Both interstate and state-federal full faith and credit obligations apply to the enforceability

of judgments and therefore incorporate otherwise applicable limitations on enforceability. Thus,

“a final judgment in one State, if rendered by a court with adjudicatory authority over the subject

matter and persons governed by the judgment, qualifies for recognition throughout the land.” 

Baker ex rel. Thomas v. General Motors Corp. 522 U.S. 222, 233 (1998) (emphasis added). 

Plaintiff also relies on Underwriters National Assurance Co. v. North Carolina Life & Accident &

Health Insurance Guaranty Association, 455 U.S. 691 (1982), which held that decisions rendered

by an Indiana rehabilitation court were entitled to full faith and credit in North Carolina because

the Indiana court had personal jurisdiction over all parties necessary to a determination of the

North Carolina claims.

In Hawthorne, 421 F.3d at 850, the Ninth Circuit held that full faith and credit did not

extend to Pennsylvania rehabilitation and liquidation orders where the claimant in a pre-existing

action in federal court in California against an insolvent insurance company was never a party to

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the insurer’s Pennsylvania liquidation proceedings and Pennsylvania had no personal jurisdiction

over the claimant. The Ninth Circuit furthermore held that “state courts may never enjoin in

personam proceedings in the federal courts.” Id. at 851. An action is said to be in personam

when its object is to determine the rights and interests of the parties themselves in the subject

matter of the action and where the effect of a judgment in the action is merely to bind the parties

to it. An action brought by one person against another for breach of contract is a common

example of an in personam action. The present action, in which plaintiff seeks a declaration of its

rights viz-a-viz an insurance contract with defendant H&H, is an in personam action. Therefore,

rehabilitation and liquidation orders issued by the New York courts are not entitled to full faith

and credit in the present litigation.

Plaintiff also argues that general principles of comity require a stay of this action. Under

the principles of comity, “federal courts of equity should exercise their discretionary power with

proper consideration for the independence of state government in carrying out its governmental

functions. However, comity is a doctrine of discretionary abstention.” City & County of San

Francisco v. Assessment Appeals Board for the City & County of San Francisco, No. 1, 122 F.3d

1274, 1277 (9th Cir. 1997). The Supreme Court has held that “principles of comity and

federalism do not require that a federal court abandon jurisdiction it has properly acquired simply

because a similar suit is later filed in a state court.” Town of Lockport v. Citizens for Community

Action at the Local Level, Inc., 430 U.S. 259, 264 n. 8 (1977) (affirming district court’s enjoining

of state court proceedings). Here, the federal action was already pending at the time that the

rehabilitation order was filed in New York. It would therefore not violate principles of comity to

deny a stay while rehabilitation and liquidation proceedings progress in New York state court.

Also, it must be remembered that the claimants (via the arbitration) are trying to collect on

an insurance policy and the insurance company, through the rehabilitator, is using the New York

proceeding as a vehicle to deny the claim. Claimants have waited a long time for their day in

court.

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3. MCCARRAN-FERGUSON.

Finally, plaintiff argues that the McCarran-Ferguson Act requires a stay so that New York

can regulate the affairs of Inscorp without interference. The McCarran-Ferguson Act, 15 U.S.C.

1011, et seq., was enacted in 1945 as “an effort by Congress to protect states’ primary regulatory

role over the insurance industry.” Elliott v. Fortis Benefits Ins. Co., 337 F.3d 1138, 1142 n. 3 (9th

Cir. 2003). Section 1012(b) includes an express reverse preemption provision which provides

that “[n]o Act of Congress shall be construed to invalidate, impair, or supercede any law enacted

by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax

upon such business, unless such Act specifically relates to the business of insurance.” Plaintiff’s

argument is that this action necessarily “impairs” the operation of New York’s state-law

rehabilitation and liquidation regulatory scheme.

Plaintiff relies on United States Department of Treasury v. Fabe, 508 U.S. 489 (1993). In

Fabe, the Supreme Court considered whether an Ohio statute that ranked governmental claims

against an insolvent insurance company in liquidation behind other creditors was preempted by a

federal statute that ranked the government’s claims first. The Court held that pursuant to

McCarran-Ferguson’s purpose to protect policyholders, the Ohio priority statute escaped

preemption to the extent it afforded priority of insurance claims of policyholders and the costs

and expenses of administering the liquidation over the government’s priority. Id. at 493–94. 

Plaintiff argues that, similarly, “New York’s implementation of an exclusive forum for the

determination of claims is the ‘business of insurance’ under McCarran-Ferguson and, as such, is

entitled to deference from this Court” (Br. at 11).

The Ninth Circuit has rejected the argument that McCarran-Ferguson would bar the

exercise of federal jurisdiction in any lawsuit where the exercise of such jurisdiction implicates

any state law concerning the “business of insurance.” Hawthorne, 421 F.3d at 843. In all events,

this order finds that concurrent pursuit of this action will not threaten to “invalidate, impair, or

supercede” (as those terms are used in the McCarran-Ferguson Act) New York’s efforts to

establish a single equitable proceeding to liquidate or rehabilitate plaintiff. Plaintiff here seeks

merely a declaration of its rights and reformation of a contract with defendant H&H. There are

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no counterclaims in this action and Britannia would still have to present its claims through the

New York forum in order to recover on any judgment in the underlying arbitration in its favor. 

The New York state forum therefore retains exclusive jurisdiction over the rehabilitation or

liquidation of plaintiff and the disposition of plaintiff’s assets.

Moreover, the insolvent insurance companies were the defendants against whom claims

were being asserted in the opinions relied upon by plaintiff. This action is distinguishable

because it was brought by the insurance company. If plaintiff or its rehabilitator/liquidator

believe that pursuit of this action would violate New York state’s rehabilitation scheme, it is free

to dismiss its complaint.

CONCLUSION

For the reasons stated above, a stay of 60 days is GRANTED. On the present record, a

longer stay is DENIED. The final pretrial conference scheduled for February 8, 2010, is continued

to APRIL 19, 2010, AT 2:00 P.M. The trial scheduled for March 1, 2010, is continued to MAY 3,

2010, AT 7:30 A.M. If plaintiff is going to abandon this action then it must so elect in writing by

APRIL 12, 2010.

IT IS SO ORDERED.

Dated: February 3, 2010. WILLIAM ALSUP

UNITED STATES DISTRICT JUDGE

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