Opinion ID: 516422
Heading Depth: 2
Heading Rank: 3

Heading: Applying the Burford Doctrine

Text: 55 Our analysis must begin with the proposition that the regulation of insurance companies unable to meet their obligations entails the type of strong state interest in which application of Burford abstention is appropriate. Like the valuable natural resource involved in Burford, solvent and healthy insurance coverage is an essential state concern. The McCarran-Ferguson Act specifically provides that it is in the public interest for states to continue serving their traditional role as the preeminent regulators of insurance in the federal system and indicates the special status of insurance in the realm of state sovereignty. Levy v. Lewis, 635 F.2d 960, 963-64 (2d Cir.1980). As discussed above, New York has enacted a detailed, complex scheme in this area. 56 Furthermore, it is clear that the very type of partnership discussed in Burford exists between the New York state courts and the Superintendent of Insurance. The New York courts issue the orders of liquidation, enjoin suits against the liquidator to protect the proceedings, and oversee the liquidator's assessment of claims against the insurer's estate. 57 In these circumstances, assumption of jurisdiction by the federal court in a suit against an insolvent insurer in liquidation proceedings would be highly destructive of the state's regulatory scheme. As the Second Circuit recognized in holding that Burford abstention is appropriate in such a circumstance, the structure of the New York system serves the state's strong interest in centralizing claims against an insolvent insurer into a single forum where they can be efficiently and consistently disposed of. Law Enforcement Insurance Co. v. Corcoran, 807 F.2d 38, 44 (2d Cir.1986), cert. denied, 481 U.S. 1017, 107 S.Ct. 1896, 95 L.Ed.2d 503 (1987). One of the chief purposes of New York's regulatory scheme would be lost if an insurer in liquidation had to dissipate its funds defending unconnected suits across the country. 58 As the New York Court of Appeals held in In re Knickerbocker Agency, 4 N.Y.2d 245, 149 N.E.2d 885, 173 N.Y.S.2d 602 (1958), mandating that claims against an insolvent insurer be resolved in the liquidation proceedings enhances the delicate process of weighing competing claims to a limited fund. We can assume that Midland, like most insurance companies, issues policies containing identical terms to a large number of insureds. Absent the prospect of competing adjudications racing to judgment, the liquidator, subject to full review by the New York court system, is able to interpret these identical provisions in a manner permitting the fair and equitable distribution of assets to all of the insureds. While our federal system does not ordinarily ensure that courts interpret identical provisions of an insurer's policies consistently, consistent interpretation in the insurance liquidation context is much more important than it is usually because payments made to one claimant are frequently facilitated by reducing distributions to other claimants. 59 In the instant case, given the uncertainty that has divided the courts over the continuous trigger theory, see note 5 supra, and the difficulty of the question, the risk is not insubstantial that the Superintendent, reviewed by the New York state courts, would adopt a different interpretation than did the district court. Were the liquidator to construe Midland's insurance contracts more favorably to Midland than did the district court, LAQ would not only receive more on its claim than other similarly situated claimants; given the limited availability of funds, LAQ's higher return would be funded by reducing their awards. Thus the fact that the New Jersey federal court would only fix the amount of the claim and not directly insinuate itself into the allocation of claim payments from the assets of the liquidated company is irrelevant. 60 Other considerations of New York policy warrant respect for New York's liquidation proceedings. When an insurance company goes into insolvency proceedings, it necessarily disrupts the proper management of the company's litigation. Management of the company is wrenched from the company's executives and placed in the liquidator. The liquidator must immediately assume control of the company, become familiar with its operations, devise an efficient and fair strategy for dismantling the company, and devise a plan for managing the company in the interim. Like the other decisions made by the insurer's prior executives, the management of the insurer's litigation must also be reevaluated. 61 The liquidation order abruptly uproots contracts previously entered into by the insurer in order to prevent the assets of the company from wasting away and to give the liquidator additional time in which to evaluate the proper course of action. In many cases, and the instant case is typical, the insurer's litigation counsel is abruptly deprived of authority to act for the insurer. Such deprivation causes immediate confusion in any litigation; in the instant case the authority of Midland's counsel to engage in necessary discovery was not restored until eleven months after the liquidation order. Although there is a dispute between the parties as to whether Midland did nonetheless have a fair opportunity to engage in discovery in this case, the confusion caused by the liquidation order must have had a deleterious effect on Midland's ability to defend itself adequately. Moreover, an insurer in liquidation may often have trouble retaining effective counsel in light of the uncertainty created as to payment of counsel fees. 15 Failure to defer to the state regulatory scheme would greatly exacerbate these problems. 62 Our conclusion that independent proceedings against an insurer placed into insolvency proceedings are highly disruptive to the state's regulatory scheme is buttressed by New York law itself. New York has a strong regulatory policy that the liquidation of insolvent insurers can best be accomplished by noninterference from outside courts. See supra at 1040-41. New York law provides that New York courts cannot allow an action to proceed against an insurer while the insurer is in insolvency proceedings, whether the proceedings are in New York or in any other state that has adopted the Uniform Act. See 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). Moreover, the liquidating court is given the power to issue anti-suit injunctions, and the court did so in this case at the request of the Superintendent of Insurance. N.Y.Ins.Law Sec. 7419(b) (McKinney 1985). The issuance of the injunction by the court in this case indicates that both the Superintendent and the New York court believed that further maintenance of suits against Midland would be disruptive of the liquidation proceeding. 16 63 Finally, we note that the case at bar does not require this Court to lay down a per se rule that district courts must always abstain from an action against an insurance company the instant a state court places the company in liquidation proceedings. The decision as to whether abstention is appropriate may require an inquiry into the facts of the specific case before the court. 64 We thus turn to the facts of the case before us. The state court ordered Midland into liquidation on April 3, 1986. It is at this point, or at least at the point the motion regarding abstention was filed on June 30, 1986, from which we must evaluate the district court's decision not to abstain. The completion of the district court's work was still a year away and entailed additional discovery, hearings and briefing. While the district court could not have known precisely how long the litigation would run, it was clear that the litigation would continue for some time. While the extent of discovery between LAQ and Midland prior to the April 3 order is unclear from the record, the materials already discovered could be used to litigate the case in the New York courts. Moreover, the instant case exclusively involves issues of state law, which weighs in favor of abstention. 65 While LAQ will no doubt find it inconvenient to start from the beginning in another tribunal, there can be no guarantee that, were we to reach the merits of this case, it would not have to start over again anyway. Moreover, we must consider the effect of the decision in this case on future cases involving insurance liquidation proceedings. While the confluence of the issues in the suit against Midland and the suits against AHAC and Highlands in the district court would have made abstention less of a time-saver for the district court than would otherwise be the case, the fact that LAQ was also suing two other companies does not make the suit against Midland any less disruptive of the state liquidation proceeding. 17 66 We review the district court's failure to abstain under Burford for abuse of discretion. 18 We conclude, however, that Burford abstention was so clearly warranted on the facts of this case that we must reverse the district court's decision not to abstain. New York's interest in its regulatory scheme is strong. The scheme creates a partnership between the New York courts and the Superintendent of Insurance. New York law requires that claims against insolvent insurers be processed in the liquidation proceedings. And the cogent reasons why New York has adopted such a regulatory policy--equitable adjustment of claims, reduction of administrative costs, proper management of the insolvent insurer's liabilities--attest to the disruptive effect of the district court's refusal to abstain. Finally, the facts of the instant case fail to undermine reliance on any of these more general considerations. 67 We note that most courts that have discussed this question have held abstention and stay or dismissal appropriate in the circumstance of a suit against an insurer in liquidation proceedings. See Grimes v. Crown Life Insurance Co., 857 F.2d 699, 706 (10th Cir.1988) (reversing district court for failing to abstain under Burford ); Law Enforcement Insurance Co., 807 F.2d at 44 (affirming district court abstention); Brown v. Link Belt Division of FMC Corp., 666 F.2d 110, 115 (5th Cir.1982) (same); Independent Petrochemical Corp. v. Aetna Casualty & Surety Co., 672 F.Supp. 1, 6 (D.D.C.1986) (abstaining); Aims Enterprises, Inc. v. Muir, 609 F.Supp. 257, 261-62 (M.D.Pa.1985) (same); Metropolitan Life v. Board of Directors, 572 F.Supp. 460, 473 (W.D.Wis.1983) (same); Mathias v. Lennon, 474 F.Supp. 949, 955 (S.D.N.Y.1979) (same); In re Cash Currency Exchange, Inc., 762 F.2d 542, 556 (7th Cir.1985) (dictum) (abstention appropriate). Cf. Brandenburg v. First Maryland Savings and Loan, Inc., 660 F.Supp. 717, 734 (D.Md.1987) (Burford abstention appropriate in state bank receivership); Stoller v. Baldwin-United Corp., [1984 Transfer Binder] Fed.Sec.L.Rep. (CCH) p 91,678, at 99,430 (S.D. Ohio Sept. 19, 1984) (Burford abstention not appropriate because suit involved federal law). Contra Slotkin v. Brookdale Hospital Center, 357 F.Supp. 705, 708 (S.D.N.Y.1977) (declining to abstain); Arch Opening Steel Buck Corp. v. United Bonding Insurance Co., 336 F.Supp. 691, 693 (E.D.Pa.1972) (district court refused to respect liquidator's injunction and proceeded with suit without discussing abstention), aff'd without opinion, 475 F.2d 1394 (3d Cir.1973); In re Texas Turn-Key Operators, Inc., 70 B.R. 193, 196 (Bankr.S.D.Tex.1986) (declining to abstain in interpleader action). 19 68 Because we hold that the district court should have abstained under the Burford doctrine, we do not reach the issue of whether abstention would have been appropriate under Colorado River, 424 U.S. 800, 96 S.Ct. 1236, 47 L.Ed.2d 483. Nor do we reach the interesting question whether a New Jersey federal court sitting in diversity must defer to the New York liquidation proceeding because that is what a New Jersey state court would do. 20