Guaranty Associations, and other claims as the Court deems appropriate . . . while offering
due process to all claimants who object to his recommendations.” Def. Mot. to Stay, Ex. B2,
at 2.

The rehabilitator will examine each claimant’s claim and make a determination
regarding that claim, which will act as a recommendation to the claimant. Jd. The
rehabilitator then must serve the claimant a “Notice of Determination” for each claim, which
advises the claimant of the recommendation amount. Jd. The claimant may object to the
amount by serving a written objection upon the rehabilitator within sixty days. Id. The
rehabilitator must contact the claimant and attempt to resolve any objection. Jd. at 3. In the
event the objection is not resolved, the matter is referred to a court-appointed referee who
hears the claimant’s objection and reports on its validity. Jd. Upon the issuance of the
teferee’s report, either the claimant or the rehabilitator may petition the court for an order
confirming the report. Jd. In the event that no objection is received, the rehabilitator shall
make an ex parte motion no earlier than seventy-five days after the date of the Notice of
Determination for an order approving and confirming the adjudications of the claim. Jd.

As aresult of the new information detailed in the May 10, 2004 order, Defendant filed
the present Motion to Stay Proceedings under the principles of abstention, arguing that this
Court now has enough information to conclude that the New York rehabilitation court is in

a special relationship of technical oversight or concentrated review of Plaintiffs claims.



information set forth in the May 10, 2004 New York Supreme Court order regarding the
rehabilitation court, this Court now knows exactly what type of rehabilitation proceedings
the New York court employs and is in a better position to determine if those proceedings are
in a special relationship of technical oversight or concentrated review.

After a review of the New York rehabilitation proceedings, it is clear that those
proceedings are identical to the rehabilitation of “Insurer C” in Property & Casualty
Insurance Ltd. and therefore satisfies the Burford requirements. The New York
rehabilitation proceedings clearly are in a special relationship of concentrated review of
Plaintiffs surety bond claim, as their purpose is to facilitate judicial review of all of
Frontier’s claimants, to expedite the resolution of such claims, to prevent the unnecessary
expenditure of assets, and to provide a fair, equitable and unified procedure for all claimants
of Frontier. See Def. Mot. to Stay, Ex. BI.

It is important to note also that the New York rehabilitation court is adjudicating
thousands of claims made against Defendant, many of which are similar to Plaintiffs surety
bond claims alleged in this lawsuit. At the inception of the New York rehabilitation
proceedings, Defendant’s records showed more than 12,000 open unresolved claims, with
estimated indemnity loses of more than $475 million and estimated loss adjustment expenses
of more than $60 million. See id. Furthermore, “open surety claim counts at the inception
of the proceeding were approximately 2,400 with estimated surety indemnity and loss

adjustment reserves of approximately $55 million.” Jd. This detailed and uniformed



of state efforts to establish a coherent policy with respect to a matter of substantial public
concern.” Jd.
III. DISCUSSION

In this case, the Court first must determine if either of the two Burford circumstances
are present. It is clear that there is no “difficult question of state law” present, as this case
involves a surety bond dispute to which well-established legal principles apply.
Consequently, the first Burford circumstance is not present. However, the second Burford
circumstance is present. State insurance rehabilitation proceedings are important state efforts
and are of great public concern. See generally Prop. & Cas. Ins. Ltd., 936 F.2d at 319;
Hartford Cas. Ins. Co. v. Borg-Warner Corp., 913 F.2d 419 (7th Cir. 1990). Pursuant to the
McCarran-Ferguson Act, 15 U.S.C. §§ 1011-1015, states have a great interest in maintaining
a uniform insurance rehabilitation process and have assumed primary responsibility for
regulating the insurance industry. Hartford, 913 F.2d at 426. As a result, the New York
rehabilitation process is a “matter of substantial public concern” and therefore abstention
may be appropriate in this case. See Prop. & Cas. Ins. Ltd., 936 F.2d at 322.

This abstention inquiry arises because federal court review may disrupt a New York
State’s efforts to establish a coherent public policy. Therefore, two essential elements are
necessary for this Court to abstain. Prop. & Cas. Ins. Ltd., 936 F.2d at 323. First, the state
must offer some forum in which claims may be litigated. Jd. Second, that forum must be

“special — it must stand in a special relationship of technical oversight or concentrated review



Il. LEGAL STANDARD

Abstention principles can be raised and revisited at any time during a proceeding.
Prop. & Cas. Ins. Ltd. v, Cent. Nat'l Ins. Co. of Omaha, 936 F.2d 319, 321 (7 th Cir. 1991).
There are three accepted abstention doctrines that can be applied depending on the
underlying facts of the federal case at issue. See Colorado River Conservation Dist. v.
United States, 424 U.S. 800 (1976); Younger v. Harris, 401 U.S. 37 (1971); Burford v. Sun
Oil Co., 319 U.S. 315 (1943). The principles espoused by the United States Supreme Court
in Burford v. Sun Oil provide the analytical framework within which to decide whether
abstention in favor of the state rehabilitation proceedings is appropriate in this case.

In Burford, the Supreme Court determined that a federal court’s abstention is
appropriate when judicial review in the designated state forum is “expeditious and adequate,”
in order to avoid review in the federal courts that could cause “delay, misunderstanding of
local law and federal conflict with state policy.” 319 U.S. at 327-34. Additionally, the
Supreme Court held that federal courts could give rise to “intolerable confusion” that a
specialized state forum seeks to avoid. Id.

Subsequently, the Seventh Circuit has interpreted Burford to hold that abstention is
appropriate in two circumstances. Prop. & Cas. Ins. Lid., 936 F.2d at 322. First, courts
should abstain from deciding “difficult questions of state law bearing on policy problems of
substantial public import whose importance transcends the result in the present case.” Id.

Second, courts should abstain from deciding cases where the review would be “disruptive



rehabilitation proceedings available, noting three examples to help determine what types of
rehabilitation proceedings warranted abstention:

[The rehabilitation of Insurer] A may involve nothing more than

a change in management. The rehabilitation of Insurer B may

involve nothing more than a merger with another insurer to take

advantage of needed economies of scale. The rehabilitation of

Insurer C may involve, by itself or in combination with some

other response, a specialized claims proceeding for the purpose

of centrally and uniformly resolving the claims of Central

National’s creditors. All of these actions are classified as

‘rehabilitation proceedings,’ yet not all of them involve a

specialized proceeding; only the rehabilitation of Insurer C

implicates Burford.
Id. at 320, 324. The Seventh Circuit held that the record contained no plan of rehabilitation
and that the rehabilitator openly expressed uncertainty as to how Central National’s
rehabilitation would progress. Jd. at 325. The court further noted that the rehabilitator may
be gathering Central National’s creditors in one forum to litigate their claims with uniformity,
but there was no such evidence contained on that record. Jd. at326. As aresult, the Seventh
Circuit remanded the case to the district court to determine if the Nebraska forum involved
the type of specialized proceeding that warranted abstention. Jd.

On June 30, 2003, Judge Guzman shared the same concerns as the Seventh Circuit

when he denied Defendant’s motion to reconsider the May 15, 2002 order lifting the stay of
proceedings in this case. He lacked sufficient information to determine whether the New

York rehabilitation proceedings were in a special relationship of technical oversight or

concentrated review that would warrant abstention under Burford. However, with the new



Minute-Order Form (0697)

Name of Assigned Judge Morton Denlow Sitting Judge if Other
or Magistrate Judge than Assigned Judge
CASE NUMBER 01 C2785 DATE 8/9/2004
CASE Mountain Funding, Inc. vs. Frontier Insurance Co.
TITLE

[In the following box (a) indicate the party filing the motion, ¢.g., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature

of the motion being presented.)

(11)

MOTION:
DOCKET ENTRY:
(1) Qa Filed motion of [ use listing in “Motion” box above.]
(2) o Brief in support of motion due
(3) a Answer brief to motiondue___. Reply to answer briefdue___.
(4) ao Ruling/Hearingon____setfor___—_ at
(5) oO Status hearing[held/continued to] [set for/re-set for}on___—ssetffor__—aat
(6) im} Pretrial conference[held/continued to] [set for/re-set for]on_____—set for at_
(7) Oo Trial[set for/re-set for]on__at
(8) go [Bench/Jury trial] [Hearing] held/continued to____at
(9) ia) This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]
OOFRCP4(m) ClLocalRule 41.1 OFRCP41(a\(1) OO FRCP41(a)(2).
ao) [Other docket entry] Enter Memorandum Opinion and Order. Defendant’s motion to stay

proceedings [71-1] is granted. Status hearing set for 2/10/05 at 10:00 a.m.

a [For further detail see order attached to the original minute order.]

No notices required, advised in open court.

No notices required,
umber of notices,

United States District Court, Northern District of Illinois 0 R | Gl NA L

Notices mailed by judge’s staff.

yo 1 2

date docketed

in =

Notified counsel by telephone.
Docketing to mail notices.

Mail AO 450 form. ane : sia 'S ma)

Wefoling defury\nitials

Copy to judge/magistrate judge.
syvr004

date mailed notice
courtroom

DK deputy's
initials

DK6

‘eetitral Clerk’s Office, ‘mailing deputy initials



Ltd. v. Central National Insurance Co. of Omaha, 936 F.2d 319 (7th Cir. 1991). Mallon v.
Frontier Insurance Co., No. 01 C 2556 (N.D. III. minute order dated July 16, 2004).
IV. CONCLUSION

For the above stated reasons, Defendant’s Motion to Stay Proceedings is granted.

SO ORDERED THIS 9th DAY OF AUGUST, 2004.

WMotin Kdnlons

MORTON DENLOW
UNITED STATES MAGISTRATE JUDGE

Copies mailed to:

Howard L. Teplinsky Cornelius F. Riordan

Seidler & McErlean Michael Palermo, Jr.

One North Wacker Dr., Riordan, Donnelly, Lipinsky & McKee, Ltd.
Suite 4125 10 N. Dearborn Street, Fourth Floor
Chicago, IL 60606 Chicago, IL 60602

Counsel for Plaintiff Counsel for Defendant

11



proceeding is exactly what the Seventh Circuit in Property & Casualty Insurance Ltd. found
would satisfy the Burford requirements.

Additionally, this case invokes important policy considerations that support
abstention. As noted in Hartford Casualty Insurance Co. v. Borg-Warner Corp., 913 F.2d
at 426, the importance of state policies at issue go far beyond the present litigation.
Mountain Funding should not be able to jump ahead of Frontier’s other creditors because this
litigation is outside the New York rehabilitation proceeding and must not be able to set a
precedent for other claimants to do the same. Additionally, both this Court and the New
York rehabilitation proceeding are faced with the same surety bond dispute. The possibility
of inconsistent decisions between this Court and the New York rehabilitation proceeding
could lead to confusion. Furthermore, allowing this case to proceed would lead to a system
where the state of New York would not control the ultimate distribution to Frontier’s
creditors. Id. This type of federal usurpation would be inconsistent with the McCarren-
Ferguson Act and general notions of comity. Jd.

Additionally, Frontier has been defending similar litigation in the Northern District
of INinois in Mallon v. Frontier Insurance Co., case number 01 C 2556. After New York’s
May 10, 2004 order, Frontier filed a Motion to Stay Proceedings in the Mallon case. On July
16, 2004, Judge Harry D. Leinenweber stayed the proceedings because the procedure
outlined by the Supreme Court of New York comported with the abstention requirements as

set out in Burford v. Sun Oil Co., 319 U.S. 315 (1943), and Property & Casualty Insurance

10



to the evaluation of those claims.” Jd. There is no dispute that New York has provided a
state forum in which Plaintiff’s claims may be litigated. As a result, the issue in this case is
whether the New York rehabilitation proceeding has a special relationship of technical
oversight or concentrated review to evaluate Plaintiff's claims.

The Seventh Circuit addressed this issue in the factually similar case, Property &
Casualty Insurance, Ltd. v. Central National Insurance Co. of Omaha, 936 F.2d319 (7th Cir.
1991). In that case, Property & Casualty Insurance, Ltd. (“PCIL”) filed a complaint against
Central National Insurance Co. (“Central National”) because of a contract dispute regarding
a reinsurance agreement. Jd. at 320. The parties had conducted significant amounts of
discovery and had filed cross-motions for summary judgment when Nebraska’s director of
insurance placed Central National into rehabilitation. Jd. The Nebraska rehabilitator
petitioned the district court to either stay or dismiss the district court case, and the district
court held that the principles announced in Burford required abstention. Jd. PCIL appealed.
Id. at 320.

On appeal, the Seventh Circuit could not determine if the rehabilitator commenced
the type of proceeding that warranted abstention under Burford. Id. There was no indication
that the rehabilitator attempted to commence a proceeding in any special relationship of
technical oversight or concentrated review to the evaluation of creditor claims against Central
National. Jd. The Seventh Circuit then investigated the possible types of rehabilitation

proceedings available to Central National and found that there were three possible types of



toreconsider. Mountain Funding, Inc., No. 01 C 2785, 2003 U.S. Dist. LEXIS 11274, at *15
(N.D. Ill. June 30, 2003). Judge Guzman explained that abstention is the exception to the
norm in federal court and that Defendant failed to establish that the New York rehabilitation
court stands in a “special relationship” with the facts and issues involved in this case. Id. at
*14. Judge Guzman further noted that “there is an absence of information concerning the
nature of the [New York rehabilitation] proceedings, what types of claims are being litigated,
and a schedule for the completion of rehabilitation.” Jd. The parties then consented to have
this case tried before this Court pursuant to 28 U.S.C. § 636(c)(1). The case then proceeded
to the verge of trial before Defendant brought this motion for a stay, claiming that the
concems raised by Judge Guzman now have been addressed and resolved by an order entered
by the New York rehabilitation court.
B. NEW YORK REHABILITATION PROCEEDINGS

On May 10, 2004, the New York rehabilitation court entered a formal order approving
an interim procedure for judicial review of the rehabilitation proceedings for adjudication of
claims. In the Matter of the Rehabilitation of Frontier Ins. Co., No. 1357/03 (N.Y. Sup. Ct.
order dated May 10, 2004). The purpose of the rehabilitation proceedings is to facilitate
judicial review of Frontier’s claimants, to expedite the resolution of such claims, to prevent
the unnecessary expenditure of assets, and to provide a fair, equitable, and unified procedure
for all claimants of Frontier, See Def. Mot. to Stay, Ex. B1, at 6. “The procedure will enable

the Rehabilitator to dispose of surety claims, which would not be covered by the majority of



A. PROCEEDINGS BEFORE JUDGE GUZMAN

On November 29, 2000, Plaintiff filed this lawsuit in the Superior Court of New
Jersey as a result of Defendant’s alleged failure to pay on a surety bond issued by Defendant.
Defendant then removed this case to federal district court in New Jersey. Subsequently, the
case was transferred to the Northern District of Illinois and assigned to Judge Guzman.

On August 25, 2001, the Superintendent of Insurance for the State of New York filed
a rehabilitation proceeding against Defendant in the Supreme Court of New York. Jn the
Matter of the Application of Gregory V. Serio, No. 405090/01 (N.Y. Sup. Ct. order dated
Oct. 10,2001). The New York rehabilitation court entered an order enjoining and restraining
any person from commencing or prosecuting lawsuits or proceedings against Defendant for
180 days. Pursuant to that order, Defendant moved Judge Guzman to stay these proceedings,
which he did on November 13, 2001. Six months later, Judge Guzman accepted briefs and
heard oral arguments on the issue of continuing the stay indefinitely, which he declined to
do; on May 15, 2002, Judge Guzman lifted the Stay of Proceedings and permitted discovery
to proceed.

Defendant then filed a motion to reconsider the May 15, 2002 order lifting the Stay
of Proceedings. Defendant argued that the district court should abstain from this action
because New York’s rehabilitation court is the proper court to handle Plaintiff's underlying
surety bond dispute because the court stands in a “special relationship” with the facts and

issues involved in the case. However, on June 30, 2003, Judge Guzman denied the motion



IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION
MOUNTAIN FUNDING, INC., )
)
Plaintiff, ) Case No. 01 C 2785
)
Vv. )
)
FRONTIER INSURANCE CoO., ) Magistrate Judge Morton Denlow Bb
) ipo
Defendant. ) 4Ug ee 7)
Lg,
log

MEMORANDUM OPINION AND ORDER

This case comes before this Court on a motion by Frontier Insurance Co, (“Frontier”
or “Defendant’”) to stay this proceeding in favor of a New York state court insurance
rehabilitation proceeding that is adjudicating all claims — including a claim from Mountain
Funding, Inc. (“Plaintiff”) ~ against Defendant. See In the Matter of the Rehabilitation of
Frontier Ins. Co., No. 1357/03 (N.Y. Sup. Ct. order dated May 10, 2004), For the reasons
set forth below, Defendant’s motion to stay is granted.

I. BACKGROUND FACTS

The facts of this case have been recited in great detail in Judge Ronald A. Guzman’s
opinion in Mountain Funding, Inc. v. Frontier Insurance Co., No. 01 C2785, 2003 U.S. Dist.
LEXIS 11274 (ND. Ill. June 30, 2003). Therefore, what follows are the facts materially

pertinent to a decision on Defendant’s motion to stay proceedings, which is now before the

f|

Court.