Opinion ID: 516422
Heading Depth: 2
Heading Rank: 2

Heading: The Purpose of the Uniform Act

Text: 35 The New York courts have expressed a strong commitment to preserving the independence of insurance liquidation proceedings from outside interference. This policy of noninterference has been held necessary for the proceedings to achieve their purpose of protecting the insurer's creditors and the public. 36 According to the New York Court of Appeals, the dominant purpose of New York's insurance insolvency law is the preservation and enhancement of that company's assets to the end that the interests of all its creditors, policyholders, stockholders and the public will be subserved. In re Knickerbocker Agency, 4 N.Y.2d 245, 253, 149 N.E.2d 885, 890, 173 N.Y.S.2d 602, 609 (1958) (declining to give effect to an arbitration clause in a contract between an insurer in insolvency proceedings and its agents). The Court of Appeals explained that the liquidation proceeding 37 is intended to and does furnish a 'comprehensive, economical, and efficient method for the winding up of the affairs' of ... insurance companies by the Superintendent of Insurance. [The liquidation] provisions of the Insurance Law 'are exclusive in their operation and furnish a complete procedure for the protection of the rights of all parties interested.' ... The Supreme Court, in the liquidation proceeding, must take cognizance of the interests of the policy-holders, creditors, stockholders, and the public, and it may issue such orders 'as may be deemed necessary to prevent interference with the superintendent or the proceeding, or waste of the assets of the insurer.' Clearly does the plan emerge that the Supreme Court, with the agency of the Superintendent of Insurance, was intended to have exclusive jurisdiction of claims both for and against an insurance company in liquidation. 38 4 N.Y.2d at 250, 149 N.E.2d at 889, 173 N.Y.S.2d at 606-07 (citations omitted). 39 New York's policy is best illustrated by the Court of Appeals' decision in G.C. Murphy Co. v. Reserve Insurance Co., 54 N.Y.2d 69, 429 N.E.2d 111, 444 N.Y.S.2d 592 (1981). The court unanimously held that the Uniform Insurers Liquidation Act required a creditor seeking reimbursement under a New York insurance contract to pursue its claim in liquidation proceedings in Illinois. The case involved a state, Illinois, which had adopted the Uniform Act, an Illinois insurance company and an Illinois court order sending the insurer into liquidation proceedings six years after the commencement of the insured's litigation in the New York courts. The court did not hesitate, however, to stay the suit and send the insured to seek relief in the Illinois liquidation proceeding: 40 We are ... cognizant of the individual hardship suffered by the present plaintiff, who has been in the throes of litigation for the past seven years and now must pursue its claim in the distant forum of Illinois. By enacting the Uniform Insurers Liquidation Act, our Legislature has determined that such occasional instances of adversity are outweighed by the paramount interest of the various States in seeing that insurance companies domiciled within their respective boundaries are liquidated in a uniform, orderly and equitable manner without interference from external tribunals. 41 54 N.Y.2d at 80-81, 429 N.E.2d at 117, 444 N.Y.S.2d at 598. 9 42 New York has thus adopted a complex and thorough regulatory scheme to liquidate insolvent insurers. And the New York courts, the primary expositors of New York law in our federal system, have identified a strong New York regulatory policy that the liquidation of insolvent insurers can best be accomplished through noninterference by outside courts. Against this background, we turn to the abstention issue. 10 III. BURFORD ABSTENTION 43 A. The Character of the District Court's Order 44 It is first useful to determine the character of the order that we are reviewing. Although the language of the April 2 order itself states that it is a money judgment rather than a declaratory judgment, we construe the district court's judgment as declaratory. 45 We are persuaded that the district court intended its April 2 judgment to be declaratory because only this reading makes the judgment consistent with the district court's earlier and still efficacious opinions in the case. As noted supra at 1037, the basis for the district court's November 10, 1986 denial of Midland's motion for abstention or stay was that it would only be issuing a declaratory judgment that could be taken by LAQ to receive cents on the dollar in the New York liquidation proceeding. If we construed the district court's judgment as monetary, and we upheld the judgment after reaching the merits, LAQ would have the right to execute on the full $6,219,636 judgment directly against Midland, bypassing the liquidation proceeding. This result would vitiate the district court's November 10, 1986 opinion and its rationale for declining to abstain, even though the district court's subsequent opinions never questioned or even addressed the issues discussed in its abstention opinion. This result would also work a manifest unfairness to Midland's other creditors, whose claims in the liquidation proceedings would be automatically subordinated to LAQ's judgment. That the district court intended these results through its April 2 judgment seems most unlikely. 46 These considerations lead us to conclude that we are reviewing a declaratory judgment. 11 B. The Burford Abstention Doctrine 47 In Burford the Supreme Court reinstated the district court's dismissal of an action brought to enjoin enforcement of a Texas Railroad Commission order granting Burford a permit to drill four oil wells. The Court held that the district court had acted within its equitable discretion in dismissing the action without reaching the merits even though the action fell within its diversity and federal question jurisdiction. 48 The Court emphasized that the regulatory scheme in Burford, effected to exploit the vast Texas oil fields efficiently and to protect landowners from having the oil beneath their land drained by adjoining drillers, was a particularly difficult state problem with which the state legislature had wrestled extensively. The factual and legal issues and the regulatory scheme were intricate, complex, and unique to the state. The Supreme Court noted that the Texas courts were working partners with the Railroad Commission in the business of creating a regulatory system for the oil industry; that the state courts provided thorough judicial review of Commission orders; and that [t]o prevent the confusion of multiple review of the same general issues, the legislature provided for concentration of all direct review ... in the State district courts of Travis County. Burford, 319 U.S. at 325-26, 63 S.Ct. at 1103. As a result of their participation, state courts, like the regulatory agency itself, had developed the specialized knowledge which is useful in shaping the policy of regulation of the ever-changing demands in this field. Id. at 327, 63 S.Ct. at 1104. The Court also observed that jurisdiction over these cases engendered incursion into unsettled areas of state law. Id. at 331, 63 S.Ct. at 1106. The Court concluded that federal court participation in this integrated state scheme would only cause confusion and that [a]s a practical matter, the federal courts can make small contribution to the well organized system of regulation and review which the Texas statutes provide. Id. at 327, 63 S.Ct. at 1104. 49 Subsequent opinions of the Supreme Court have made clear that the maze of factors warranting abstention in Burford need not each be present to warrant abstention under the doctrine. As read in subsequent cases, Burford stands for the proposition that where a state creates a complex regulatory scheme, supervised by the state courts and central to state interests, abstention will be appropriate if federal jurisdiction deals primarily with state law issues and will disrupt a state's efforts to establish a coherent policy with respect to a matter of substantial public concern. Colorado River, 424 U.S. at 814, 96 S.Ct. at 1245; see also United Services Automobile Association v. Muir, 792 F.2d 356, 364 (3d Cir.1986) (Generally, Burford abstention is justified where a complex regulatory scheme is administered by a specialized state tribunal having exclusive jurisdiction.), cert. denied, 479 U.S. 1031 (1987); 1A Moore's Federal Practice p 0.203, at 2140-41 (suggesting that courts have found the potential for disruption alone provides the litmus test for abstention under Burford ). But cf. Zablocki v. Redhail, 434 U.S. 374, 380 n. 5, 98 S.Ct. 673, 678 n. 5, 54 L.Ed.2d 618 (1978) ([T]here is, of course, no doctrine requiring abstention merely because resolution of a federal question may result in the overturning of a state policy.). 50 While courts have identified the likelihood that federal adjudication would disrupt an important and complex state regulatory scheme as the preeminent consideration in deciding whether Burford abstention is appropriate, one additional factor has also come into prominence: federal courts more readily abstain from a case that contains no issue of federal law. See Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 26, 103 S.Ct. 927, 942, 74 L.Ed.2d 765 (1983) ([T]he presence of federal-law issues must always be a major consideration weighing against surrender of jurisdiction.); Izzo v. Borough of River Edge, 843 F.2d 765, 768 (3d Cir.1988) ([I]n the years since Burford the presence of a federal issue has become a significant element in deciding whether a court should abstain.). 12 51 The Burford opinion relies, in part, on the traditional discretion of a federal equity court ... 'to enforce or protect legal rights, the exercise of which may be prejudicial to the public interest.'  Burford, 319 U.S. at 317-18, 63 S.Ct. at 1099 (quoting United States v. Dern, 289 U.S. 352, 360, 53 S.Ct. 614, 617, 77 L.Ed. 1250 (1933)). The question this raises is whether Burford abstention is appropriate in a case, like the one at bar, where the court is not being asked to provide equitable relief. 52 In its comprehensive restatement of abstention doctrine in Colorado River, the Supreme Court failed to mention the relevancy of equitable relief in describing the reach of Burford. Of greater importance, however, is that the 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 as a court of equity makes no sense. 53 Moreover, the Supreme Court has unequivocally moved away from the distinction between legal and equitable relief with respect to its other abstention doctrines. See Colorado River, 424 U.S. at 817, 96 S.Ct. at 1246 (abstention on grounds of wise judicial administration appropriate in a case involving declaratory relief); Fornaris v. Ridge Tool Co., 400 U.S. 41, 43-44, 91 S.Ct. 156, 157-58, 27 L.Ed.2d 174 (1970) (abstention to avoid adjudication of constitutional question appropriate in a case involving money damages); United Gas Pipe Line Co. v. Ideal Cement Co., 369 U.S. 134, 135-36, 82 S.Ct. 676, 677, 7 L.Ed.2d 623 (1962) (same); Clay v. Sun Insurance Office Ltd., 363 U.S. 207, 212-13, 80 S.Ct. 1222, 1226, 4 L.Ed.2d 1170 (1960) (same); Fair Assessment in Real Estate Association v. McNary, 454 U.S. 100, 116, 102 S.Ct. 177, 186, 70 L.Ed.2d 271 (1981) (principle of comity bars taxpayers' damage actions brought in federal courts under 42 U.S.C. Sec. 1983 to redress the allegedly unconstitutional administration of state tax system); Deakins v. Monaghan, 484 U.S. 193, 108 S.Ct. 523, 530, 98 L.Ed.2d 529 (1988) (upholding Third Circuit rule staying Sec. 1983 damage suits pending resolution of state criminal proceedings involving Sec. 1983 suit issues); Louisiana Power & Light Co. v. City of Thibodaux, 360 U.S. 25, 28, 79 S.Ct. 1070, 1072, 3 L.Ed.2d 1058 (1959) (abstaining in a case involving the eminent domain power and noting that the abstention cases do not apply a technical rule of equity procedure[,] ... [but] reflect a deeper policy derived from our federalism.). 13 54 Because these cases suggest that the distinction between legal and equitable relief is no longer important in the abstention context, we conclude that Burford abstention is appropriate in cases seeking declaratory relief, even though such relief does not fall within the traditional boundaries of equity jurisdiction. 14