1995 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

1-20-1995

Riley v Simmons

Precedential or Non-Precedential:

Docket 94-5055

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Recommended Citation

"Riley v Simmons" (1995). 1995 Decisions. Paper 17.

http://digitalcommons.law.villanova.edu/thirdcircuit_1995/17
 UNITED STATES COURT OF APPEALS 

 FOR THE THIRD CIRCUIT 

 ___________ 

 No. 94-5055 

 ___________ 

 CHARLES N. RILEY; THELMA LEVINE; 

 DR. DONALD I. SCHIFFMAN, on behalf of 

 themselves and all others similarly situated 

v. 

 TED D. SIMMONS; HENRY E. KATES; JOHN LLOYD HUCK; 

 STEPHEN CARLOTTI; FRED E. BROWN; 

 EDWARD MERRICK BULL; RAYMOND E. CARTLEDGE; 

 JAMES E. FERLAND; ELLEN V. FUTTER; PAUL HARDIN; 

 PETER HARRIS; THE ESTATE OF JOHN HARRISON KREAMER; 

 ROCCO J. MARANO; JOSH WESTON 

 Thelma Levine, and Donald I. Schiffman, 

 on behalf of the uncertified Class 

 consisting of all persons, except 

 Defendants, who purchased or otherwise 

 beneficially acquired securities that 

 were incorrectly and misleadingly 

 labelled or described as annuities from 

 Mutual Benefit Life Insurance Company 

 during the period August 14, 1988 to 

 July 15, 1991, 

 Appellants 

 ___________ 

 Appeal from the United States District Court 

 for the District of New Jersey 

 (D.C. Civil Docket No. 91-cv-03626) 

 ___________ 

 Argued: August 8, 1994 

 PRESENT: HUTCHINSON and NYGAARD, Circuit Judges, 

 and LUDWIG, District Judge* 

 (Filed January 20, 1995) 

 ____________ 

_______________ 
* Hon. Edmund V. Ludwig, United States District Judge for the 

 Eastern District of Pennsylvania, sitting by designation. 
Kenneth A. Jacobsen, Esquire 

Ira Neil Richards, Esquire (Argued) 

Lisa J. Rodriguez, Esquire 

Lisa Chanow Dykstra, Esquire 

Chimicles, Jacobsen & Tikellis 

One Haverford Centre 

361 West Lancaster Avenue 

Haverford, PA 19041 

 and 

Daniel W. Krasner, Esquire 

Peter C. Harrar, Esquire 

Wolf, Haldenstein, Adler, Freeman & Herz 

270 Madison Avenue 

New York, NY 10016 

 Attorneys for Appellants Thelma Levine and Dr. 

Donald I. Schiffman 

Lawrence A. Blatte, Esquire 

Rosen & Reade 

757 Third Avenue 

New York, NY 10017 

 Attorney for Appellant Dr. Donald I. Schiffman 

Steven S. Radin, Esquire (Argued) 

Joseph L. Buckley, Esquire 

Paul F. Doda, Esquire 

Sills, Cummis, Zuckerman, Rading, Tischman, Epstein & Gross, P.A. 

One Riverfront Plaza 

Newark, NJ 07102-5400 

 Attorneys for Appellees Ted D. Simmons, John Lloyd 

Huck, Stephen Carlotti, Fred E. Brown, Edward Merrick 

Bull, Raymond E. Cartledge, James E. Ferland, Ellen V. 

Futter, Paul Hardin, Peter Harris, The Estate of John 

Harrison Kreamer, Rocco J. Marano and Josh Weston 

Bruce E. Baldinger, Esquire 

45 Route 206 South 

P.O. Box 8017 

Somerville, NJ 08876 

 Attorney for Appellee Henry E. Kates 

Deborah T. Poritz, Esquire 

 Attorney General of the State of New Jersey 

Sharon M. Hallanan, Esquire 

 Deputy Attorney General 

Hughes Justice Complex, CN 117 

Trenton, NJ 08626 
 and 

Robert L. Ritter, Esquire (Argued) 

David M. Kohane, Esquire 

Cole, Schotz, Meisel, Forman & Leonard, P.A. 

25 Main Street 

Hackensack, NJ 07601 

 Attorneys for Intervenor/Appellees, Andrew J. 

Karpinski, Acting Commissioner of Insurance of the 

State of New Jersey and Rehabilitator of Mutual Benefit 

Life Insurance Company in Rehabilitation 

 ____________ 

 

 OPINION OF THE COURT 

 ____________ 

HUTCHINSON, Circuit Judge. 

 Appellants, Thelma Levine ("Levine") and Donald 

Schiffman ("Schiffman") (collectively "Plaintiffs"),1 appeal an 

order of the United States District Court for the District of New 

Jersey dismissing their action without prejudice following the 

court's decision to abstain from considering their federal 

securities claims under Burford v. Sun Oil Co., 319 U.S. 315 

(1943). Plaintiffs sought relief under the federal securities 

laws alleging misrepresentations that induced them to purchase 

certain annuities issued by Mutual Benefit Life Insurance Company 

("Mutual Benefit" or the "Company"), an insolvent insurance 

company now in rehabilitation proceedings before the New Jersey 

 

1. Plaintiffs are the class representatives for a class 

consisting of all persons, except for the former officers and 

directors of Mutual Benefit Life Insurance Company ("Mutual 

Benefit" or the "Company"), who purchased certain annuities, 

which the class alleges were in fact securities subject to the 

federal securities laws, from Mutual Benefit. 
Commissioner of Insurance (the "Commissioner" or the 

"Rehabilitator"). The district court permitted the intervention 

of the Commissioner for the limited purpose of filing a motion to 

dismiss Plaintiffs' complaint or, in the alternative, to stay the 

action pending the outcome of a separate state action commenced 

by the Commissioner in his role as the Rehabilitator of Mutual 

Benefit. The district court thereafter concluded that 

continuation of Plaintiffs' action at this time would conflict 

with the ongoing state rehabilitation proceedings. It also 

concluded that Plaintiffs could receive "timely and adequate 

state court review" of all their claims, including the federal 

securities claims, because all of these claims were essentially 

grounded in fraud. From these premises, the district court 

determined that Burford abstention counseled against continuation 

of Plaintiffs' case at this time and dismissed Plaintiffs' action 

without prejudice subject to possible reconsideration following 

the completion of the Commissioner's rehabilitation efforts. 

 Because federal jurisdiction over one of the claims is 

exclusive and there is an independent basis for federal 

jurisdiction over the remaining claims, all of which may belong 

directly to the Plaintiffs, we hold that the district court erred 

when it concluded that there is an opportunity for timely and 

adequate state court review of Plaintiffs' federal securities 

claims. We will therefore reverse the district court's order 
dismissing Plaintiffs' case without prejudice and remand for 

further proceedings consistent with this opinion.2

 

2. Judge Ludwig concurs in the result. 
 I. Factual & Procedural History

 A. General Background

 Mutual Benefit was established in 1845. As of July 

1991, it was one of the country's largest life insurance 

companies, with approximately 700,000 policyholders and 

annuitants and assets approaching $14 billion. 

 Until the late 1970's Mutual Benefit was a relatively 

conservative institution, known as "the Tiffany of the insurance 

industry." In the late 1970s, and early 1980s, however, Mutual 

Benefit, like other insurance companies, began to expand its 

products beyond the traditional life insurance policy. It 

marketed and sold a variety of annuity contracts, including 

premium deferred annuities, flexible annuities and guaranteed 

investment contracts. It began to speculate in high-risk 

ventures and to unduly concentrate its holdings in real estate. 

 This speculation and excessive investment in real 

estate eventually led credit agencies to downgrade Mutual 

Benefit's credit rating. Thereafter, in the first half of 1991, 

Mutual Benefit's customers withdrew $500 million from the 

Company. These withdrawals were projected to reach $1 billion by 

the end of the year. 
 B. New Jersey Rehabilitation Proceedings

 On July 16, 1991, New Jersey's Attorney General, with 

the consent of Mutual Benefit's Board of Directors, asked the 

Superior Court of New Jersey, Chancery Division for Mercer County 

(the "state court") to place Mutual Benefit in rehabilitation 

under the supervision of the Commissioner. The state court 

granted the request, appointed the Commissioner Rehabilitator of 

Mutual Benefit and vested him with all the powers available under 

New Jersey's version of the Uniform Insurers Liquidation Act (the 

"UILA"), N.J. Stat. Ann. §§ 17B:32-1 to 17B:32-30 (West 1985) 

(repealed 1992). See In re Rehabilitation of Mutual Benefit Life 

Ins. Co., No. C-91-00109, slip op. at 2 (N.J. Super. Ct. Ch. Div. 

July 16, 1991) (the "Rehabilitation Order").3

 The Rehabilitation Order granted the Commissioner 

exclusive title, possession to, and control over Mutual Benefit's 

assets. Id. at 4. It enjoined all persons from interfering in 

any way with the Commissioner in the discharge of his 

rehabilitation duties or in his possession of the property and 

assets of Mutual Benefit, including any causes of action 

 

3. In 1992, while Mutual Benefit's Rehabilitation was ongoing, 

the New Jersey Legislature repealed the UILA and enacted the Life 

& Health Insurers Rehabilitation & Liquidation Act (the "RLA"), 

N.J. Stat. Ann. §§ 17B:32-31 to 17B:32-91 (West Supp. 1994). The 

RLA's purpose is "the protection of the interests of insureds, 

claimants, creditors and the public generally" by clarifying the 

law, equitably apportioning any unavoidable losses, and providing 

a comprehensive rehabilitation and liquidation scheme. N.J. 

Stat. Ann. § 17B:32-31(b) (West Supp. 1994). The Legislature 

expressly made the RLA applicable to pending rehabilitation 

proceedings. N.J. Stat. Ann. § 17B:32-37. 
belonging to the Company. Specifically, the Rehabilitation Order 

provides that: 

 All officers, directors, policyholders, 

agents, and employees of Mutual Benefit and 

all other persons or entities of any nature, 

including but not limited to claimants, 

holders of annuity contracts, beneficiaries 

under any Mutual Benefit contract, plaintiffs 

or petitioners in any action against Mutual 

Benefit . . . having claims of any nature 

against Mutual Benefit including crossclaims, 

counterclaims and third party claims, are 

hereby enjoined and restrained from: 

* * * 

 b. bringing, maintaining or further 

prosecuting any action at law, suit in 

equity, special or other proceeding against 

Mutual Benefit, its estate in receivership or 

against the Commissioner and his successors 

in office, as Rehabilitator thereof . . . ; 

 c. making or executing any levy upon 

the property or estate of Mutual Benefit; 

* * * 

 e. interfering in any way with the 

Commissioner, or any successors in office, in 

his possession of or title to the property 

and assets of Mutual Benefit, or in the 

discharge of his duties as Rehabilitator 

thereof, pursuant to this Order. All persons 

or entities of any nature other than the 

Rehabilitator, are hereby restrained from 

commencing any direct or indirect actions 

against any reinsurer of Mutual Benefit for 

proceeds of any reinsurance policies issued 

to . . . or other agreements with, Mutual 

Benefit. 

Id. at 5-7. On August 7, 1991, the state court entered an order 

continuing the Commissioner's appointment as Mutual Benefit's 
Rehabilitator. In re Rehabilitation of Mutual Benefit Life Ins. 

Co., No. C-91-00109 (N.J. Super. Ct. Ch. Div. Aug. 7, 1991). 

 On March 20, 1992, the state court authorized the 

Commissioner to extend Mutual Benefit's $20 million executive 

liability policy (the "D & O Policy"). Mutual Benefit paid a $1 

million premium in order to extend this policy. As partial 

consideration for this premium, the extended policy was construed 

to cover actions brought by the Commissioner against the former 

directors and officers of Mutual Benefit despite an exclusion in 

the original policy for actions by one insured against other 

insureds. In re Rehabilitation of Mutual Benefit Life Ins. Co., 

No. C-91-00109 (N.J. Super. Ct. Ch. Div. Mar. 20, 1992) (order 

extending indemnification and reconsidering the decision denying 

extension of insurance). 

 In late 1991, the Commissioner's financial analysis of 

Mutual Benefit showed that, as of June 30, 1991, the Company's 

assets had a going concern value that was only about 88% of its 

liabilities.4 The Commissioner's report estimated the 

liquidation value of the Company, on a six month basis, at 55% of 

its liabilities. 

 On August 3, 1992, the Commissioner submitted a Plan of 

Rehabilitation to the state court. This plan (the 

"Rehabilitation Plan") guarantees full death, disability and 

 

4. The Commissioner's report indicated that Mutual Benefit then 

had liabilities of $9.9 billion and $8.8 billion in assets. His 

valuation of Mutual Benefit's assets assumed that it would remain 

a going concern and would hold its assets for an average of five 

to ten years. 
retirement benefits and restructures permanent life policies and 

other contracts into non-participating universal contracts with 

minimum guaranteed interest rates. The Rehabilitation Plan also 

restricts withdrawals during a rehabilitation period ending 

December 31, 1999. In re Rehabilitation of Mutual Benefit Life 

Ins. Co., No. C-91-00109, slip op. at 23-28 (N.J. Super. Ct. Ch. 

Div. Aug. 12, 1993). 

 Under the Rehabilitation Plan, policyholders would 

recover 88% of the present value of their July 1991 account 

balances. The Plan provides an alternative opt out provision 

entitling policyholders to immediate payment of 55% of the value 

of their original account. 

 The state court held hearings on the Rehabilitation 

Plan over a four month period beginning in January 1993. The 

court's opinion, issued August 12, 1993, affirms the 

Rehabilitation Plan in most respects. Appeals from that order 

have been filed in state court. 

 During the rehabilitation process, the Commissioner 

investigated the causes of Mutual Benefit's collapse. On July 8, 

1993, the Commissioner filed a complaint in the state court on 

behalf of "Mutual Benefit, its policyholders, creditors and other 

interested parties" against thirty-eight named defendants, 

including many of the officers and directors who managed the 

Company from 1979 through 1991, Appellants' Appendix ("App.") at 

449, and the Company's outside accountants, Ernst & Young. The 

complaint alleges theories of recovery based on negligence, 

breach of fiduciary duty, fraud, waste and violations of New 
Jersey's Consumer Fraud Act, N.J. Stat. Ann. §§ 56:8-1 to 56:8-48 

(West 1989 & Supp. 1994). In the state court action, the 

Commissioner seeks to recover damages for the benefit of Mutual 

Benefit's estate and "to recover, particularly for the benefit of 

Mutual Benefit's policyholders who have priority in the 

distribution of Mutual Benefit's assets, damages . . . which have 

resulted in loss to the Company and diminution in the value of 

the insurance policies and other investments held by some 700,000 

policyholders and annuitants." App. at 449. 

 The Commissioner's complaint alleges that the former 

directors and officers of Mutual Benefit mismanaged the Company 

by investing too much of the Company's assets in real estate, 

particularly high risk real estate projects, and by investing in 

leveraged buy-outs. The complaint also alleges that the 

directors and officers made material misrepresentations to Mutual 

Benefit's policyholders and annuitants regarding the financial 

condition of the Company. 

 C. New Jersey State Class Actions

 On July 17, 1991, one day after the state court placed 

Mutual Benefit in rehabilitation, the first of six state class 

actions was filed. The other five class actions were filed 

within the week, and the state court eventually consolidated all 

six into one action. 

 The state class action complaints are similar to the 

Commissioner's complaint. They allege excessive investment in 

high-risk, non-performing real estate ventures and leveraged 
buy-outs, as well as public misrepresentations concerning Mutual 

Benefit's financial condition. They assert claims for fraud, 

negligent misrepresentation, breach of fiduciary duty, and 

negligence. 

 The various plaintiffs in the state class actions moved 

for class certification. The Commissioner opposed class 

certification and sought dismissal of the action on the ground 

that the Commissioner had standing to bring the claims asserted 

therein and that continuation of the class action suits would 

impede the rehabilitation effort. 

 The state court denied the plaintiffs' motion for class 

certification in the state actions without prejudice holding that 

the Commissioner had a prior right to pursue these claims and 

satisfy them out of the $20 million D & O Policy. The state 

court stayed the class actions and ruled that after the 

Commissioner's action was concluded, a Rehabilitation Plan 

approved, and all appeals exhausted, it would decide whether 

plaintiffs had been made whole and whether their actions should 

proceed as a class action, if at all. In re Mutual Benefit Life 

Policyholders Action Litigation, No. L-91-5318, slip op. at 2 

(N.J. Super. Ct. Jan. 5, 1993). The state court permitted 

discovery to proceed only to the extent plaintiffs' efforts 

"[did] not require any input from the rehabilitation estate and 

[did] not interfere with the prior orders of the Court in the 

rehabilitation action." Id. at 3. In orders dated January 25, 

1993, and June 8, 1993, respectively, the Superior Court of New 

Jersey, Appellate Division and the New Jersey Supreme Court 
denied the plaintiffs' motions for leave to appeal the lower 

court's decision. 

 D. The Present Case

 On August 15, 1991, Plaintiffs5 filed this federal 

class action suit on behalf of themselves, and all others 

similarly situated, against a number of officers and directors of 

Mutual Benefit in the district court. These same officers and 

directors are the defendants in the Commissioner's state court 

suit, as well as the state court class actions. 

 The Plaintiffs sought class certification on behalf of 

all purchasers of Mutual Benefit annuities between August 14, 

1988 and July 15, 1991. Approximately 200,000 individuals fall 

into this category. Plaintiffs' complaint alleges that the 

various directors and officers joined as defendants: (1) 

violated sections 5 and 12(1) of the Securities Act of 1933 (the 

"Securities Act"), 15 U.S.C.A. §§ 77e, 77e(1) (West 1981), by 

failing to register Mutual Benefit's annuity products with the 

SEC as securities; (2) made materially false or misleading 

statements in the prospectuses issued in connection with the 

annuities in violation of section 12(2) of the Securities Act, 15 

U.S.C.A. § 77e(2) (West 1981); (3) were liable as controlling 

persons of Mutual Benefit under section 15 of the Securities Act, 

 

5. The record shows that Levine and Charles Riley initially 

filed this suit. Schiffman subsequently filed a suit which the 

district court consolidated with the Levine/Riley suit. Riley is 

not named as a plaintiff in the amended complaint filed after 

consolidation of the two cases. 
15 U.S.C.A. § 77o (West 1981); (4) made materially false and 

misleading statements about the financial strength of Mutual 

Benefit thereby inducing Plaintiffs to purchase the annuities in 

violation of section 10(b) of the Securities Exchange Act of 1934 

(the "Securities Exchange Act"), 15 U.S.C.A. § 78j(b) (West 

1981); and (5) violated New Jersey Statutory and common law, 

including the New Jersey Consumer Fraud Act, N.J. Stat. Ann. 

§§ 56:8-1 to 56:8-48 (West 1989 & Supp. 1994). The Plaintiffs 

alleged that Mutual Benefit compiled a real estate portfolio that 

lacked adequate diversification; that Mutual Benefit's overall 

portfolio had a substantial concentration in real estate; and 

that Mutual Benefit made improper investments. 

 On August 6, 1993, the officers and directors named as 

defendants in this action moved to dismiss the complaint because 

the district court did not have subject matter jurisdiction, the 

Plaintiffs had failed to state a claim, and they had failed to 

assert their fraud claims with the particularity required. The 

officers and directors also moved to dismiss the complaint on the 

basis of the Burford abstention doctrine or, alternatively, to 

stay the action until the Commissioner's action is concluded. On 

August 20, 1993, the Commissioner moved to intervene in this 

action, and to join the officers' and directors' motion to 

dismiss Plaintiff's complaint on abstention grounds or to enter a 

stay until the conclusion of the state proceedings. 
 On December 13, 1993, the district court granted the 

Commissioner's motion to intervene6 and dismissed the complaint, 

without prejudice on the basis of Burford abstention. See Riley 

v. Simmons, 839 F. Supp. 1113 (D.N.J. 1993). This timely appeal 

followed. 

 II. Jurisdiction & Standard of Review

 We review the district court's decision to abstain for 

abuse of discretion, but the district court's analysis of the law 

on abstention is subject to de novo review. Thus: 

 "A district court has little or no discretion 

to abstain in a case that does not meet 

traditional abstention requirements. Within 

these constraints, determination whether the 

exceptional circumstances required for 

abstention exist is left to the district 

court, and will be set aside on review only 

if the district court has abused its 

discretion." 

Grode v. Mutual Fire, Marine & Inland Ins. Co., 8 F.3d 953, 

957-58 (3d Cir. 1993) (quoting United Serv. Auto Ass'n v. Muir, 

792 F.2d 356, 361 (3d Cir. 1986), cert. denied, 479 U.S. 1031 

(1987)). 

 The district court had subject matter jurisdiction 

pursuant to section 22 of the Securities Act, 15 U.S.C.A. 

§ 77v(a), and section 27 of the Securities Exchange Act, 15 

U.S.C.A. § 78aa. Section 27 grants the federal courts "exclusive 

 

6. Plaintiffs appeal only the district court's decision to 

abstain, not its decision to permit the Commissioner to intervene 

in the federal court action. 
jurisdiction" over any violation arising under the Securities 

Exchange Act. 15 U.S.C.A. § 78aa. In the order which the 

Plaintiffs appeal the district court said: "This Court will 

dismiss the action without prejudice as Burford abstention is 

appropriate." Riley, 839 F. Supp. at 1129. This phrasing raises 

a question concerning our appellate jurisdiction. We have a duty 

to inquire independently into our own jurisdiction. 

 Under Borelli v. City of Reading, 532 F.2d 950, 951-52 

(3d Cir. 1976) (per curiam), a district court order which 

dismisses a complaint without prejudice is generally not 

considered a final appealable order. It is final and appealable, 

however, if the plaintiff cannot amend the complaint to remove 

the ground of dismissal. Borelli, 532 F.2d at 952 (citations 

omitted). The district court's decision to abstain under Burford

leaves the Plaintiffs unable to amend the complaint to remove the 

reason for the district court's dismissal. Moreover, a decision 

to abstain is necessarily "without prejudice" because it always 

prevents the court from proceeding to the merits. Thus, Borelli

does not apply to this case. 

 In Baltimore Bank for Cooperatives v. Farmers Cheese 

Cooperative, 583 F.2d 104 (3d Cir. 1978), we considered our 

appellate jurisdiction over a district court order staying an 

action on the basis of Burford abstention. We noted first that 

the proper disposition of a case to which Burford abstention 

applies is a "'dismissal of the action, rather than retention of 

jurisdiction pending a state determination . . . .'" Id. at 108 

(citing Charles Wright, Federal Courts § 52, at 200 (1970)); see
also Erwin Chemerinsky, Federal Jurisdiction § 12.3, at 612 

(1989) ("Burford abstention--abstention out of deference to 

centralized state administrative proceedings--requires the 

federal court to dismiss the case."). We then went on to state: 

 But the technical failure to dismiss should 

not render an ordinarily final disposition of 

the case on the basis of abstention 

unappealable. Drexler v. Southwest Dubois 

School Corp., 504 F.2d 836, 838 (8th Cir. 

1974) (en banc). Such an abstention order is 

for all intents and purposes a final 

disposition of the case within the meaning of 

28 U.S.C. § 1291 and is therefore appealable. 

Indiana State Employees Ass'n, Inc. v. 

Boehning, 511 F.2d 834 (7th Cir. 1975). 

Id. at 108-09. We explained our Baltimore Bank holding on 

appellate jurisdiction in Richman Brothers Records, Inc. v. U.S. 

Sprint Communications Co., 953 F.2d 1431 (3d Cir. 1991). There 

we stated: 

 The teachings of Farmers Cheese are 

two-fold: administrative abstention orders, 

which completely relinquish federal 

jurisdiction by giving way to state

administrative agencies, are final decisions 

appealable under section 1291; orders 

transferring discrete issues involving 

regulatory expertise under the doctrine of 

primary jurisdiction, by giving way to a 

federal administrative agency, are not final 

decisions appealable under section 1291. 

Richman Bros. Records, Inc., 953 F.2d at 1442. We opined: 

"Generally, when a federal court abstains in deference to a state 

court or regulatory agency, the abstention necessarily ends the 

federal court's involvement with the suit." Id. at 1443; see

also Chemerinsky, § 12.3, at 612 ("The effect of Burford
abstention is thus not to postpone federal court review but to 

prevent it entirely."). 

 Finally, in Carr v. American Red Cross, 17 F.3d 671, 

678 (3d Cir. 1994), we held that, "where [a] dismissal of an 

appeal will have the practical effect of denying later appellate 

review of a district court's underlying order, the underlying 

order must be final, within the meaning of 28 U.S.C. § 1291." In 

this case, if we were to determine that we lacked appellate 

jurisdiction, we would effectively render the district court's 

decision to abstain unreviewable. Our rationale in Baltimore 

Bank, Richman Brothers Records, Inc., and Carr demonstrates the 

finality of the district court's order. Accordingly we have 

appellate jurisdiction over this case under 28 U.S.C.A. § 1291 

(West 1993). 

 III. Analysis

 Federal courts have an obligation to exercise their 

jurisdiction. Abstention, therefore, is the exception rather 

than the rule. See Hawaii Housing Auth. v. Midkiff, 467 U.S. 

229, 236 (1984); Colorado River Water Conservation Dist. v. 

United States, 424 U.S. 800, 817 (1976). Moreover, Burford

abstention has particular relevance to claims arising in the 

course of state regulation of insolvent insurance companies. See

Grode, 8 F.3d at 958; Lac D'Amiante Du Quebec, Ltee. v. American 

Home Assurance Co., 864 F.2d 1033, 1045 (3d Cir. 1988) ("LAQ"); 

cf. University of Md. v. Peat Marwick Main & Co., 923 F.2d 265, 

270-71 n.6 (3d Cir. 1991) (assuming for purposes of case that 
state regulation of insurance companies can provide the relevant 

"complex regulatory scheme" or "coherent policy with respect to a 

matter of substantial public concern" that are Burford

prerequisites). Recognizing these principles, we examine the 

district court's decision to apply Burford abstention to 

Plaintiffs' claims, including their federal securities claims, 

and to dismiss this action. 

 The Supreme Court has summarized Burford's underlying 

principles as follows: 

 Where timely and adequate state-court review 

is available, a federal court sitting in 

equity must decline to interfere with the 

proceedings or orders of state administrative 

agencies: (1) when there are "difficult 

questions of state law bearing on policy 

problems of substantial public import whose 

importance transcends the result in the case 

then at bar"; or (2) where the "exercise of 

federal review of the question in a case and 

in similar cases would be disruptive of state 

efforts to establish a coherent policy with 

respect to a matter of substantial public 

concern." 

New Orleans Pub. Serv., Inc. v. Council of New Orleans, 491 U.S. 

350, 361 (1989) ("NOPSI") (quoting Colorado River Water 

Conservation Dist., 424 U.S. at 814). The principles just 

quoted, however, fail to tell the whole story. In NOPSI, the 

Supreme Court also teaches us that Burford abstention calls for a 

two-step analysis. The first question is whether "timely and 

adequate state-court review" is available. Id. Only if a 

district court determines that such review is available, should 

it turn to the other issues and determine if the case before it 
involves difficult questions of state law impacting on the 

state's public policy or whether the district court's exercise of 

jurisdiction would have a disruptive effect on the state's 

efforts to establish a coherent public policy on a matter of 

important state concern. 

 In this case, the district court emphasized the 

disruptive effect that the continuation of the federal action 

would have on the parallel state rehabilitation proceedings. In 

considering whether Plaintiffs had an opportunity for "timely and 

adequate state court review" of their federal securities claims, 

the district court equated them with the common law fraud claims 

the Commissioner was pursuing in his state action. It then 

reasoned: "This is not a case where plaintiffs' federal claims 

give them an independent or separate remedy" and so concluded 

that the state court action provided "'timely and adequate' state 

court review. . . ." Riley, 839 F. Supp. at 1127. 

 Plaintiffs first contend that Burford abstention is 

available only in cases invoking equitable remedies and that 

their request for class certification and a declaratory judgment 

is not primarily addressed to what used to be the equity side of 

the court. Plaintiffs also challenge the district court's legal 

premise conflating the federal securities claims with the state 

common law fraud claims. They argue that the district court 

erred in concluding that "timely and adequate state court review" 

of their federal securities claims is available and, accordingly, 

that the district court's order dismissing their action without 

prejudice should be reversed. In the alternative, Plaintiffs 
argue that the district court abused its discretion when it 

concluded that the continuation of the federal securities action 

would exert a disruptive effect on the state rehabilitation 

proceedings and interfere with the state's attempt to establish a 

coherent policy relating to the regulation of insolvent insurance 

companies. 

 Preliminarily, we consider Plaintiffs' argument that 

the district court erred in invoking Burford abstention in a case 

in which the primary remedy they seek is money damages. We are 

referred again to NOPSI and our own decision in University of 

Maryland. In NOPSI, the Supreme Court did indeed state that "a 

federal court sitting in equity must decline to interfere with" 

state court proceedings where Burford abstention requirements are 

met. See NOPSI, 491 U.S. at 361 (emphasis added). In Baltimore 

Bank, this Court stated: 

 Burford, as we have already indicated, was an 

equitable action. . . . The instant 

litigation to recover a debt is a legal 

action. Traditionally, abstention has been 

applied only in cases involving equitable 

relief. The district court, 

however, . . . impermissibly extended 

abstention to a common law action. 

Baltimore Bank, 583 F.2d at 111 (citation omitted). In 

University of Maryland, we said that Baltimore Bank was still 

good law in this Circuit. University of Maryland, 923 F.2d at 

271. 

 Plaintiffs therefore argue that Burford abstention is 

inappropriate given this Court's statements in University of 
Maryland and Baltimore Bank. The officers and directors of 

Mutual Benefit, along with the Commissioner, contend that 

Plaintiffs are really seeking rescission, an equitable remedy, 

and Burford abstention is not precluded even if it remains 

available only in cases that stand in equity.7

 

7. Although this panel is bound by the earlier holdings of this 

Court under Internal Operating Procedure 9.1, see Hammond v. 

Commonwealth Mortgage Corp. of Am., 27 F.3d 52, 57 (3d Cir. 1994) 

(In re Hammond), the comments in this footnote relating to 

Burford abstention in non-equity cases are the opinion of the 

opinion writer, not the Court. For a contrary view, see Nygaard, 

J., concurring. In my opinion, it is not at all clear whether 

the statement in Baltimore Bank restricting Burford abstention to 

equity is a holding that survives as the law relating to Burford

abstention has developed or that the Supreme Court's reference in 

NOPSI to equity and our reference to it in University of Maryland

and Baltimore Bank are anything but dicta. Furthermore, 

substantial confusion continues as to when an action brought 

under the federal system's unification of law and equity is 

primarily equitable. Considering these uncertainties, I would be 

inclined to follow the lead of another panel of this Court faced 

with the same issue. It decided: 

 Decisional authority remains inconclusive as 

to whether Burford abstention may be ordered 

only in cases of an equitable nature, or 

whether, as [we stated in LAQ], the 

distinction between legal and equitable 

relief is not dispositive in abstention 

cases. Hence, we are hesitant to sustain [a] 

claim that the district court's abstention 

order should be reversed, relying solely on 

the ground that [Plaintiffs'] seek[] money 

damages, rather than either declaratory or 

injunctive relief. 

General Glass Indus. Corp. v. Monsour Medical Found., 973 F.2d 

197, 202 (3d Cir. 1992) (emphasis added). The Baltimore Bank

issue concerning Burford's restriction to suits in equity was not 

initially addressed by the parties, but the Court asked for and 

received supplemental briefing on it. This strengthens my 

reluctance to decide the case on the ground that Burford

abstention is limited to cases primarily equitable in nature. My 

conclusion that Burford abstention does not apply to this case 

for other reasons makes it unnecessary for me to delve into 
 In this case, however, we believe the key to Burford

abstention is whether the Plaintiffs have an opportunity for 

"timely and adequate state court review" of their claims. Where 

a state court lacks jurisdiction over a plaintiff's claim, 

Burford abstention is clearly inappropriate because there can be 

no opportunity for "timely and adequate state court review" of a 

claim that a court has no power to decide. See University of 

Maryland, 923 F.2d at 274 (abstention is inappropriate because it 

would deprive plaintiffs "of a forum and of all recourse to have 

their claims heard on the merits"). 

 Section 27 of the Securities Exchange Act gives federal 

district courts exclusive jurisdiction over claims arising under 

that Act. See 15 U.S.C.A. § 78aa.8 In Evans v. Dale, 896 F.2d 

975 (5th Cir. 1990), the court of appeals reversed a district 

court order, which dismissed on Burford principles security 

(..continued) 

issues involving arcane distinctions between law and equity and 

their continuing relevance to abstention doctrine. I note, 

however, that section 12(1) or section 12(2) claims under the 

Securities Act may be brought in either law or equity. See

Thomas Lee Hazen, The Law of Securities Regulation §§ 7.2, 7.5, 

at 276, 301 (2d ed. 1990); see also infra note 11 (discussing 

rescissionary nature of section 12 of the Security Act). 

8. Section 27 provides: 

 The district courts of the United 

States . . . shall have exclusive

jurisdiction of violations of this chapter or 

the rules and regulations thereunder, and of 

all suits in equity and actions at law 

brought to enforce any liability of duty 

created by this chapter or the rules and 

regulations thereunder. 

15 U.S.C.A. § 78aa (emphasis added). 
claims arising in the course of a domestic relations dispute. 

Evans brought a federal suit, which was ancillary to her divorce 

action against her husband Dale, seeking recovery under federal 

securities law for misrepresentations Dale had made about 

corporate stock during a state court proceeding for division of 

property. Evans, 896 F.2d at 976-77. The district court relied 

on Burford, heavily emphasizing the reluctance of federal courts 

to intervene in issues of state domestic relations law. The 

court of appeals held that abstention was inappropriate because 

the plaintiff's federal securities claims were subject to 

exclusive federal jurisdiction and so could not be considered in 

any state court. Id. at 978-79; see also Finkielstain v. Seidel, 

857 F.2d 893, 896 (2d Cir. 1988) (holding Burford abstention 

inapplicable to action seeking relief for alleged violations of 

the Securities Exchange Act within the exclusive jurisdiction of 

the federal courts). 

 The Securities Exchange Act gives federal courts 

exclusive jurisdiction over Plaintiffs' Rule 10b-5 claim and 

necessarily deprives New Jersey state courts of jurisdiction over 

that claim.9 Like the courts in Evans and Finkielstain, we will 

 

9. Rule 10b-5 implements section 10(b) of the Securities 

Exchange Act. It provides: 

 It shall be unlawful for any person, 

directly or indirectly, by the use of any 

means or instrumentality of interstate 

commerce, or of the mails or of any facility 

of any national securities exchange, 

 (a) To employ any device, 

scheme, or artifice to defraud, 
reverse the district court's decision to abstain on Burford

principles because there is no possibility of "timely and 

adequate state court review" of Plaintiffs' Rule 10b(5) claim, 

which Congress has chosen to commit exclusively to the federal 

courts.10

 The district court concluded that all of Plaintiffs' 

claims would receive "timely and adequate state court review" 

because Plaintiffs' security claims were essentially the 

equivalent of the common law fraud claims being pursued by the 

Commissioner in the state court action. The district court 

stated: "No further relief can be obtained by asserting the 

(..continued) 

 (b) To make any untrue 

statement of a material fact or to omit 

to state a material fact necessary in 

order to make the statements made, in 

light of the circumstances under which 

they were made, not misleading, or 

 (c) To engage in any act, 

practice, or course of business which 

operates or would operate as a fraud or 

deceit upon any person, 

 in connection with the purchase or sale of any 

security. 

17 C.F.R. § 240.10b-5 (1993). 

10. Considering the impact such actions may have on procedures 

for the rehabilitation or orderly liquidation of insolvent 

insurance companies, which Congress has entrusted exclusively to 

the states, see 15 U.S.C.A. §§ 1011, 1012 (West 1976), and the 

crushing impact that an insurance company's inability to pay the 

claims of its insureds and other creditors may have, one could 

wonder about the wisdom of this doctrine, but we believe it is 

beyond this panel's power to change it. 
section 10(b)-5 claim vis-a-vis the Rehabilitator's state court 

common law fraud claim." Riley, 839 F. Supp. at 1127. 

 It is clear, however, that Rule 10b-5 establishes a 

cause of action distinct from one for common law fraud. See, 

e.g., Marcel Kahan, Games, Lies & Securities Fraud, 67 N.Y.U. L. 

Rev. 750, 757, 760-61 (1992). Indeed, the legislative history of 

the Securities Exchange Act and its text show that Congress 

concluded that the common law remedies of deceit, fraud and 

misrepresentation were inadequate and unfair to the average 

investor. Consequently it made significant changes in the means 

by which liability for those common law torts could be 

established. The district court's reliance on the surface 

similarity of the Rule 10b-5 remedy to common law remedies for 

fraud and misrepresentation highlights the district court's 

failure to consider all of Plaintiffs' securities claims, 

particularly those based on sections 5 and 12(1) of the 

Securities Act. Section 5 of the Securities Act requires a 

seller of securities to file a registration statement before 

offering a security for sale unless the securities offered come 

within statutorily defined exemptions. See 15 U.S.C.A. § 77e. 

Section 12(1) provides that a purchaser of a security that is not 

registered in accord with section 5 has a civil action for 

damages against the seller of the security. Id. § 77l(1).11 

 

11. Section 12(1) is essentially a rescissionary remedy. It 

provides that the person who sells the security is liable to the 

purchaser for: 

 the consideration paid for such security with 

interest thereon, less the amount of any 
This cause of action and the remedy it affords are clearly 

different from common law actions. 

 In reaching its determination that Plaintiffs had an 

opportunity for "timely and adequate state court review" of their 

claims, the district court may have also conflated any injury the 

putative common law fraud of the officers and directors caused 

the purchasers of the variable annuities with any injury that 

fraud caused Mutual Benefit and all of its policyholders to 

suffer.12 We have held that Burford abstention is inappropriate 

where a plaintiff asserts "claims which are broader than, and 

different from, the Commissioner's. . . ." General Glass, 973 

F.2d at 204. We have also acknowledged that individual 

stockholders may have a distinct and independent cause of action 

(..continued) 

income received thereon, upon the tender of 

such security, or for damages if he no longer 

owns the security. 

15 U.S.C.A. § 77l(1). Similarly, Plaintiffs' remedy under 

section 12(2) of the Securities Act is essentially a remedy of 

rescission. 15 U.S.C.A. § 77l(2). That section provides a 

remedy for material misstatements or omissions made in connection 

with the sale or offer for sale of a security. 

12. We use the subjunctive "may have" because any difference 

between the injury the purchasers of these annuities suffered and 

the injuries the company or its policyholders face depends on 

whether the annuities are securities subject to federal 

securities law or a type of insurance policy subject to state 

insurance law. That question, which involves the merits of the 

Plaintiffs' federal and state claims, is yet to be answered. If 

it is answered in the negative, there would then appear to be an 

adequate opportunity for review of the remaining common law 

claims in the courts of New Jersey, in which case the district 

court would have to consider whether it should decline to 

exercise supplemental jurisdiction pursuant to 28 U.S.C.A. 

§ 1367(c)(3) over the Plaintiffs' common law claims. 
from that of the corporation or other stockholders premised on 

misrepresentations by officers and directors of a corporation. 

Hayes v. Gross, 982 F.2d 104, 108 (3d Cir. 1992) ("[A]n 

individual stockholder may sue officers and directors based on an 

injury distinct from the injury to the corporation and the 

indirect injury to stockholders generally."). Plaintiffs' 

federal securities claims, like their common law claims, arise 

out of the direct losses they suffered as a result of purchases 

of annuities by Plaintiffs and other persons similarly situated 

to Plaintiffs. Their claim is for losses they directly suffered, 

not as stockholders derivatively injured by the directors' or 

officers' failure to meet their fiduciary duties to the 

corporation. The district court erred when it concluded that 

Plaintiffs' federal securities claims were the same as those 

being pursued by the Commissioner in the state action.13 We hold 

that Plaintiffs' claims, if they turn out to be viable federal 

securities claims, are distinct from those the Commissioner now 

presses in the pending state action.14 Therefore, if the 

 

13. Similar analysis might demonstrate that Plaintiffs' fraud 

claims under both New Jersey common law and the New Jersey 

Consumer Fraud Act are personal to Plaintiffs. Thus, on remand 

if the federal claims survive on the merits, the district court 

may also have to determine whether Plaintiffs' state law cause of 

action for fraud encompasses an injury distinct from any injury 

suffered by Mutual Benefit. 

14. The district court's opinion indicates that the Commissioner 

was permitted to intervene for the limited purpose of arguing in 

favor of Burford abstention. A closer look at its opinion, 

however, indicates it also concluded that the Commissioner would 

have standing to prosecute the Plaintiffs' federal securities 

claims under New Jersey law. See Riley, 839 F. Supp. at 1127. 

In reaching this conclusion, the district court relied on N.J. 
annuities Plaintiffs bought are securities, they cannot receive 

timely and adequate state court review as required by Burford. 

 We do not rely entirely on any general proposition that 

"[a]bstention is also inappropriate . . . [where] a federal issue 

is involved which [gives] the district court independent federal 

jurisdiction." Grode, 8 F.3d at 960. Taken in its most 

expansive sense, that proposition would preclude abstention no 

matter how important the state interest or how severe the federal 

interference with the state's scheme for resolution of problems 

Congress has seen fit to entrust to the states. Nevertheless, 

(..continued) 

Stat. Ann. § 17B:32-50(a)(15) and In re Integrity Insurance Co., 

573 A.2d 928 (N.J. Super. A.D. 1990). The parties have not 

argued the propriety of the district court's intervention 

decision on this appeal and therefore we are unwilling to 

consider that issue. We note, however, statements in In re 

Integrity Insurance Co. indicating that the Commissioner only has 

standing to pursue derivative, as opposed to direct, claims of 

creditors and policyholders. See In re Integrity Insurance Co., 

573 A.2d at 935 (distinguishing between claims "on behalf of" 

creditors and policyholders and claims "belonging to" creditors 

and policyholders). As explained, Plaintiffs' claims seem to be 

direct claims that are personal in nature at least to the extent 

that they seek damages under the federal securities laws. 

 Section 17B:32-50(a)(15) gives the Commissioner the power to 

prosecute actions on "behalf of" policyholders as opposed to 

those "belonging to" policyholders. N.J. Stat. Ann. 

§ 17B:32-50(a)(15) (West Supp. 1994). The statute expressly 

gives the Commissioner standing to pursue such actions when he 

acts in liquidation proceedings. It does not mention 

rehabilitation proceedings. Compare N.J. Stat. Ann §§ 17B:32-41, 

17B:32-42 (providing grounds under which Commissioner may 

petition state court to place insurance company in rehabilitation 

proceedings) and id. § 17B:32-42 (providing that Commissioner 

shall be appointed rehabilitator and outlining responsibilities 

of Commissioner in rehabilitation capacity) with id. §§ 17B:32-

45, 17B:32-50 (providing grounds under which Commissioner may 

petition state court to place insurance company in liquidation). 
the circumstances present in this case, in which the district 

court may ultimately decide that the annuities Plaintiffs 

purchased are not securities offered in violation of federal 

securities law, should lead the district court to proceed 

cautiously. 

 We recognize the Commissioner's argument that 

Plaintiffs, by pursuing this action, can put themselves in a 

position superior to Mutual Benefit's other policyholders and 

claimants who are wholly dependent on the rehabilitation 

proceedings. There is some force to the Commissioner's 

contention that allowing this action to continue is likely to 

interfere with the process of marshalling the assets of Mutual 

Benefit and equitably distributing them among all persons who 

hold claims against the Company. In this respect, both the 

Commissioner and the district court focus on the $20 million fund 

the D & O Policy created. They contend that Plaintiffs' action 

may remove from Mutual Benefit's estate funds needed for 

equitable apportionment among the claims asserted in the state 

rehabilitation proceedings. The Commissioner asserts in his 

brief: "Any judgment for [Plaintiffs] would wipe out the limits 

of the $20 million D & O Policy, and would leave the Commissioner 

without insurance coverage for the claims of the other 500,000 

policyholders not represented by Plaintiffs' proposed class." 

Brief for Intervenor/Appellee at 37. He thus concludes that 

Plaintiffs' ability to proceed in a federal forum promotes a race 

to the courthouse that can detrimentally affect Mutual Benefit 

and its other policyholders. 
 The officers and directors, as defendants, join this 

argument, adding their voices to a chorus raising the inequity 

that may result from allowing Plaintiffs to compete in a race for 

collection of the D & O Policy's limited fund after the 

Commissioner has already spent $1 million of Mutual Benefit's 

dollars to ensure that the proceeds of this policy would be 

available to its estate. Both the Commissioner and the 

defendants also argue that continuation of this action, no matter 

what its outcome, will diminish the funds available to Mutual 

Benefit and its policyholders because the D & O Policy limits 

will be reduced under policy provisions for their use in paying 

defendants' legal fees. 

 We, like the district court, are troubled by diversion 

of funds from Mutual Benefit and its policyholders to the cost of 

litigation that benefits only one class of persons injured by the 

acts of the Company's officers and directors. A remedy for that 

problem, however, is beyond the power of this panel under 

existing statutory law and what we believe is binding Supreme 

Court precedent and circuit procedure. Governing case law seems 

to us to make it clear that mere interference with the 

Commissioner's ability to marshall the Company's assets cannot 

justify Burford abstention over claims exclusively subject to 

federal jurisdiction. 

 Moreover, if the D & O Policy is an essential source of 

estate funds, this case appears analogous to Hayes v. Gross, 

where this Court rejected a similar argument when it was advanced 

by the Resolution Trust Company (the "RTC"). In Hayes, the 
plaintiff was a purchaser of the stock of a failed savings 

association and sought to recover damages from officers and 

directors of the association for violations of the federal 

securities laws. Hayes, 982 F.2d at 105. While the savings 

association was in receivership RTC asked to have the action 

dismissed, arguing that the claim arose out of various officers' 

and directors' mismanagement of the savings association, and that 

it was therefore a derivative, as opposed to a direct claim. Id. 

RTC also argued that continuation of the action would impair its 

ability to comply with its statutory mandate to maximize the 

assets of the savings association. Id. at 109. 

 We considered whether the continuation of plaintiff's 

case affected RTC's prosecution of a mismanagement suit on behalf 

of the savings association against the officers and directors. 

We stated: 

 Allowing plaintiff to pursue this claim will 

neither prejudice the corporation and its 

other stockholders nor permit a double 

recovery for the same injury. If [the 

savings association] has claims against its 

officers and directors arising from their 

mismanagement, the RTC is free to pursue 

those claims for the ultimate benefit of the 

creditors and stockholders of [the savings 

association]. Assuming solvency on the part 

of the defendants, as we must on this record, 

we see no conflict between plaintiff's 

interest and those of the creditors and other 

stockholders. Assuming insolvency on the 

part of the defendants, a conflict between 

plaintiff and [the savings association], as 

creditors of the defendants, may arise, but 

the RTC has advanced no persuasive reason 

why, in such circumstances, plaintiff and 

[the savings association] should not be 

treated as any other creditors competing for 

a limited pool of resources.
 As far as the potential for double 

recovery is concerned, plaintiff has alleged 

that the market price of [the savings 

association's] stock when he purchased it was 

far in excess of what it would have been had 

the market been evaluating the failing 

institution that defendants knew [it] to be. 

Plaintiff will have to prove this allegation. 

When he attempts to do so, it may be that he 

will attempt to recover compensation to which 

the corporation is justly entitled. If so, 

the district court will be required to 

evaluate the prospect of double recovery in 

the specific fact context presented by 

plaintiff's case on damages. It will suffice 

for present purposes to conclude, as we do, 

that double recovery is not inherent in 

plaintiff's theory of the case and, 

accordingly, that recovery without 

duplication is possible. 

Id. at 108-109 (footnotes omitted) (emphasis added). 

Specifically, we also noted, that "[i]f both plaintiff and the 

RTC prove[d] entitled to judgment, there [would] be no inequity 

in requiring defendants to satisfy both judgments." Id. at 109. 

 The assumption of ultimate solvency may be quite 

optimistic, but in this case, as in Hayes, we are constrained to 

act within the record and this record does not show that the 

D & O Policy is essential to the rehabilitation of Mutual 

Benefit. We see nothing on the face of this record that supports 

the Commissioner's conclusion that the D & O Policy is the only 

asset available for satisfaction of a judgment against the 

various officers and directors who are defendants. Similarly, in 

University of Maryland, we rejected this argument when it was 

advanced in support of Burford abstention. There, concluding 
that the policyholders' claims were direct, as opposed to 

derivative, we held that Burford abstention was inappropriate. 

 Hayes, and University of Maryland, compel this panel to 

hold that it is inappropriate to dismiss a plaintiff's action 

solely because collection of a judgment, if obtained, might 

reduce the assets of an insolvent insurance company's estate.15 

The Commissioner's argument may support a conclusion that 

continuation of the federal action is likely to disrupt "'state 

efforts to establish a coherent policy with respect to a matter 

of substantial public concern,'" but as we have stated throughout 

this opinion this is insufficient to justify Burford abstention 

when there is no opportunity for "timely and adequate state court 

 

15. This principle was acknowledged by The United States Court 

of Appeals for the Fifth Circuit in rejecting the application of 

Burford abstention to plaintiff's claims in Evans v. Dale: 

 By deciding the federal securities fraud 

issues asserted here, the district court will 

not usurp any part of Texas domestic 

relations law. It is true that the outcome 

of the exclusively federal issue may affect 

the relative value of property distributions 

which will be made by the Texas court and may 

even require a redistribution of that 

property. However, the decision regarding 

distribution or redistribution under Texas 

domestic relations law will remain entirely 

within the authority of the Texas court. If 

the district court orders disgorgement of the 

profits made by Dale in stock transactions 

subsequent to the divorce or takes other 

remedial action allowed by the federal 

securities laws, it will do so under its 

exclusive jurisdiction vested pursuant to 

those laws. 

Evans, 896 F.2d at 979. 
review" of Plaintiffs' claims. NOPSI, 491 U.S. at 261 (quoting 

Colorado River Water Conservation Dist., 424 U.S. at 814). 

 Plaintiffs' claims in this case, like those in Hayes

and University of Maryland, appear to be direct claims for their 

own injuries. Their federal security claims are substantially 

different than, and distinct from, the claims advanced by the 

Commissioner in the state action. To the extent that Plaintiffs 

have asserted valid securities claims,16 it seems clear to us 

that those claims are direct, rather than derivative. As we have 

already noted, however, the problem created by the lack of an 

opportunity for state court review would be eliminated if 

Plaintiffs' annuities are not "securities" under federal law. 

Moreover, if Plaintiffs do recover under the federal securities 

laws, they should no longer be entitled to share in the funds of 

the Company, including any funds realized from the Commissioner's 

action against the directors and officers in state court. 

Therefore, as we noted in Hayes, it would be appropriate for the 

district court, in determining damages, to adjust the Plaintiffs' 

remedy in this action to account for any potential for double 

recovery in the state rehabilitation proceeding. See Hayes, 982 

F.2d at 109. 

IV. 

 

16. As we have previously noted, the district court did not 

reach the merits of Plaintiffs' securities claims, nor do we. 

See supra notes 12 and 13. 
 In conclusion, we hold that Burford abstention is 

precluded when a state court has no jurisdiction over a 

plaintiff's direct as opposed to derivative claims. When a 

plaintiff presses a direct claim within the jurisdiction of a 

federal court, there is no basis for Burford abstention, if the 

plaintiff cannot receive timely or adequate state court review of 

the claim. Here, it is clear that Plaintiffs' 10b-5 claim falls 

exclusively within the province of the federal courts. Moreover, 

as to their claims under sections 5, 12(1), 12(2), and 15 of the 

Securities Act, it is equally apparent that there is no 

opportunity for timely state court review, as these claims are 

personal to the Plaintiffs. Because the district court erred 

when it conflated Plaintiffs' federal securities claims with the 

common law fraud claims of the Commissioner, and in concluding 

that Plaintiffs had an opportunity for timely and adequate state 

court review of their claims, we will reverse the district 

court's order dismissing Plaintiffs' claims under the Burford

abstention doctrine, and remand for further proceedings 

consistent with this opinion. 
Riley v. Simmons, No. 94-5055 

 

NYGAARD, Circuit Judge, concurring. 

 I agree with the opinion of the court that the district 

court erred when it applied Burford abstention. I also believe, 

alternatively, that Burford abstention is simply not available 

when legal, rather than equitable or declaratory, relief is 

sought. 

 In Baltimore Bank for Coops. v. Farmers Cheese Coop., 

583 F.2d 104, 111 (3d Cir. 1978), a bank filed a diversity action 

seeking monetary recovery for milk it had sold and delivered to 

the defendant. The district court abstained under Burford, but 

we reversed, holding that Burford abstention is not available in 

legal, common law actions. We stated: 

 Burford . . . was an equitable action to 

restrain the Texas Railroad Commission. The 

instant litigation to recover a debt is a 

legal action. Traditionally, abstention has 

been applied only in cases involving 

equitable relief. The district court, 

however, . . . impermissibly extended 

abstention to a common law action. 

Id.

 A decade later, we broadened the scope of Burford

abstention in Lac D'Amiante du Quebec, Ltee. v. American Home 

Assur. Co., 864 F.2d 1033 (3d Cir. 1988). In that case, an 

asbestos manufacturer sued its insurer for a declaratory judgment 

rather than money damages. The insurer, as here, was in state 

rehabilitation proceedings. We noted that Burford relied on the 

traditional discretion of a federal equity court to enforce or 
protect legal rights, stating the issue as "whether Burford

abstention is appropriate in a case . . . where the court is not 

being asked to provide equitable relief." Id. at 1044. We held 

that abstention was available in the limited context of 

declaratory relief, opining: 

 [T]he central concern animating the Court's 

decision to abstain in Burford -- preventing 

the state regulatory scheme from needless 

disruption -- simply does not depend on 

whether the relief sought by the plaintiff is 

properly characterized as legal or equitable. 

If the relief sought is legal and the 

disruption is of the extent and character 

suggesting that Burford abstention is 

appropriate, a refusal to abstain simply 

because the federal court is not sitting in 

equity makes no sense. 

Id. Notwithstanding this broad dictum, however, we concluded 

"that Burford abstention is appropriate in cases seeking 

declaratory relief, even though such relief does not fall within 

the traditional boundaries of equity jurisdiction." Id. at 1045. 

In a footnote, we specifically noted that, because declaratory 

relief was created by a 1934 act of Congress, it was not a common 

law action and our holding did not conflict with Baltimore Bank. 

Id. at 1045 n.14. 

 The next year, the Supreme Court decided New Orleans 

Pub. Serv., Inc. v. Council of New Orleans ("NOPSI"), 491 U.S. 

350, 109 S. Ct. 2506 (1989). Although the Court did not decide 

the issue of whether Burford abstention is available in nonequitable actions, it did state in dictum that "[w]here timely 

and adequate state-court review is available, a federal court 
sitting in equity must decline to interfere with the proceedings 

or orders of state administrative agencies . . . ." Id. at 361, 

109 S. Ct. at 2514 (emphasis added).17 Thus, while NOPSI is 

certainly not dispositive, it lends no support whatsoever to the 

proposition that Burford abstention should be available in cases 

where the relief sought is money damages. 

 This court reviewed the issue of Burford abstention in 

legal actions in University of Md. v. Peat Marwick Main & Co., 

923 F.2d 265, 271-72 (3d Cir. 1991). There, a federal class 

action was filed against the independent auditors of a failed 

insurer in rehabilitation proceedings. The suit alleged that the 

auditors had made false and misleading statements about the 

insurer's financial condition, as a result plaintiffs bought 

insurance policies that later turned out to be no good. We 

relied on both NOPSI and Baltimore Bank and reiterated our 

earlier holding that Burford abstention is simply not available 

in a case where the plaintiff seeks only monetary damages. Id.

at 271-72. We stated: 

 [T]he Supreme Court [in NOPSI] stated, 

admittedly in dictum, that Burford abstention 

applies to a federal court sitting in equity. 

Without reading too much into this dictum, we 

believe . . . that NOPSI generally cautions 

lower federal courts not to extend Burford

abstention beyond proper bounds. Here, 

unlike Burford and the other Supreme Court 

 

17. Based on the above dictum, the Court of Appeals for the 

First Circuit has held that post-NOPSI Burford abstention is very 

narrow and is not available in legal actions. See Fragoso v. 

Lopez, 991 F.2d 878, 882 (1st Cir. 1993). 
cases involving Burford doctrine, the action 

was at law, not in equity, and sought 

monetary damages. 

Id. at 271 (quotation marks and internal citations omitted). The 

opinion then dealt with the insurance commissioner's argument 

that Lac D'Amiante had eliminated the limitation of Burford

abstention to equitable actions: 

 [Lac D'Amiante], however, predated NOPSI, and 

the Supreme Court in NOPSI has given no 

indication that the distinction between legal 

and equitable relief has been diluted. 

Furthermore, all that [Lac D'Amiante] holds 

is that Burford may be extended to cases 

seeking declaratory relief -- which is in 

many ways similar to injunctive relief -- not 

that it may be extended to cases for monetary 

damages. . . . [Lac D'Amiante] did not alter 

the principle established in Baltimore Bank.8 

 8Indeed, under our Internal Operating 

Procedures, the [Lac D'Amiante] panel could 

not have overruled the holding of a prior 

published opinion in this Circuit. 

Id. at 272 & n.8 (citation omitted). 

 Thus, as of 1991, the law in this circuit was clear: 

Burford abstention was only available where equitable or 

declaratory relief was sought. Abstention in legal actions was 

barred by Baltimore Bank and University of Maryland. 

 In General Glass Indus. Corp. v. Monsour Medical 

Foundation, 973 F.2d 197 (3d Cir. 1992), however, a panel of this 

court reached the opposite conclusion. Relying on what it 

perceived to be inconclusive authority, the General Glass panel 
refused to rule out abstention merely because the relief sought 

consisted of monetary damages. Id. at 202. 

 I think General Glass was incorrectly decided, 

containing two analytical errors. First, the panel relied on the 

dictum in Lac D'Amiante which indicated that "the distinction 

between legal and equitable relief is not dispositive in 

abstention cases," id., but did not cite or discuss the clear 

holding of Baltimore Bank that forbids abstention when money 

damages are sought.18 Second, it relied on Tafflin v. Levitt, 

493 U.S. 455, 110 S. Ct. 792 (1990), in which the Supreme Court 

affirmed a district court judgment applying Burford abstention in 

a RICO action seeking money damages. Notably, however, the 

Court's grant of certiorari in that case was limited solely to 

whether state courts have concurrent jurisdiction over RICO 

claims. Id. at 458, 110 S. Ct. at 794. Tafflin therefore had no 

precedential value on the issue before the General Glass panel. 

Thus, because the binding decisional law never was inconclusive 

in the first place, the General Glass panel's reluctance to apply 

the clear holdings of Baltimore Bank and University of Maryland

was not justified. 

 In any event, 

 Internal Operating Procedure 9.1 sets forth 

our judicial tradition that no panel of this 

court may overrule the published holding of a 

 

18. The opinion did mention University of Maryland, but only in 

a "but see" citation, without any analysis, in which it opined 

that the University of Maryland court only "intimat[ed]" that 

Burford abstention is unavailable in legal actions. Id.
previous panel. Only the in banc court may 

do that. To the extent that the decision of 

a later panel conflicts with existing circuit 

precedent, we are bound by the earlier, not 

the later, decision. 

United States v. Monaco, 23 F.3d 793, 803 (3d Cir. 1994). 

Accordingly, because General Glass flatly conflicts with both 

Baltimore Bank and University of Maryland, neither of which have 

been overruled, I am respectfully forced to conclude that 

General Glass was wrongly decided and never was the law of this 

circuit. 

 Applying Baltimore Bank and University of Maryland to 

this case, it is clear that Burford abstention is not available. 

Although the complaint does plead rescission, admittedly an 

equitable remedy, the plaintiffs have not sued the only party 

capable of giving rescission: Mutual Benefit itself. Instead, 

they have sued only the individual officers and directors, who, 

if found liable, can respond only in damages. I take no delight 

in this conclusion. Although the abstention doctrines have their 

root in equity cases, I am aware of no reason why abstention 

should not equally be available where monetary damages are 

sought. See Lac D'Amiante, 864 F.2d at 1044. As one leading 

treatise puts the matter: 

 Considerations of federalism are at the heart 

of abstention. These considerations are too 

important to be made dependent on ancient 

distinctions about the powers of the several 

courts at Westminster Hall, and the ability 

of a federal court to defer to a state in a 

proper case ought not depend on whether the 

case is thought of as "legal" or "equitable." 
17A Charles A. Wright, et al., Federal Practice and Procedure § 

4241, at 17-18 (1988). 

 Delightful or not, however, our circuit's law is clear, 

and until and unless the in banc court or the Supreme Court 

overrules Baltimore Bank, we remain bound by it.