Sevigny v . Wausau CV-03-501-JM 09/07/04 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE

Roger A . Sevigny, Insurance Commissioner as Liquidator of the Home Insurance Company

v. Civil N o . 03-501-JM Opinion N o .

Employers Insurance of Wausau a Mutual Company

O R D E R

Before the Court for consideration is the motion for remand

filed by Plaintiff Roger A . Sevigny, Insurance Commissioner of

the State of New Hampshire acting as Liquidator for the Home

Insurance Company (hereinafter “the Commissioner”). Defendant

Employers Insurance of Wausau (“Wausau”) filed an objection. For

the reasons set forth below, the Court grants the motion.

Standard of Review

Wausau removed this action, originally filed in Merrimack

County Superior Court (“Superior Court”), to federal court

asserting that this court has jurisdiction over this action under

. “[T]he right of removal being statutory, a

suit commenced in a state court must remain there until cause is

shown for its transfer under some act of Congress.” Sirois v . Bus. Express, Inc.,

2 2 , 725 (D.N.H. 1995) (quoting

Great N . Ry. C o . v . Alexander,

(1918)).

Therefore, to defeat a motion for remand, the party that removed

the action must demonstrate that the asserted basis for removal

satisfies statutory prerequisites. Id. at 725; see also Kingsley

v . Lania,

3 , 95 (D. Mass. 2002) (upon a motion

for remand, the removing party has the burden to show that the

court has subject matter jurisdiction, that removal was timely,

and that removal was proper). In deciding a motion for remand,

the court may pierce the pleadings and consider summary-judgment

type evidence such as pleadings, affidavits and deposition

transcripts. Duffin v . Honeywell Int’l, Inc.,

(N.D. Miss. 2004) (citing Hart v . Bayer Corp.,

, 246-47 (5th Cir. 2000)).

The Commissioner does not contend that the federal court

lacks subject matter jurisdiction or that there has been a defect

in the removal procedure. See

(c) (statutory

grounds for a motion for remand). Rather, the Commissioner urges

the court to decline to exercise its jurisdiction under the

abstention doctrines discussed in Burford v . Sun Oil Co.,

(1943), and its progeny, and Colorado River Water

2 Conservation Dist. v . United States,

(1976).

In considering the circumstances in which it would be

appropriate for federal courts to abstain, the Supreme Court has

found that “federal courts have a strict duty to exercise the

jurisdiction that is conferred upon them by Congress.”

Quackenbush v . Allstate Ins. Co.,

(1996).

Nevertheless, that duty is not absolute.

. Federal

courts may decline to exercise jurisdiction in exceptional

circumstances where denying a federal forum would clearly serve

an important countervailing interest.

The court’s authority

to abstain “extends to all cases in which the court has

discretion to grant or deny relief.”

.

The Burford and Colorado River abstention doctrines,

asserted by the Commissioner here, have different rationales.

In New Orleans Public Serv., Inc. v . Council of New Orleans

(“NOPSI”),

5 0 , 360-364 (1989), the Supreme Court

summarized the Burford doctrine 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

3 in the 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.”

Id. at 361 (quoting Colorado River,

1 4 ) .

There is no “formulaic test” for determining when dismissal

under the Burford doctrine is appropriate. Quackenbush,

. The court’s decision is based on a balancing of “the

strong federal interest in having certain classes of cases, and

certain federal rights, adjudicated in federal court, against the

State’s interests in maintaining “uniformity in the treatment of

an ‘essentially local problem.’”

. The Supreme Court

has found that this balance only rarely favors abstention.

Distinct from the principles of the Burford doctrine, the

Supreme Court found in Colorado River that a federal court may

abstain from hearing a matter when there is a concurrent state

proceeding based on considerations of “[w]ise judicial

administration, giving regard to conservation of judicial

resources and comprehensive disposition of litigation.”

. Such abstentions must be considered exceptional.

. The First Circuit has identified six factors that ought to

be considered in determining whether Colorado River abstention

applies based on the Supreme Court’s decisions in Colorado River

4 and Moses H . Cone Mem’l Hosp. v . Mercury Constr. Corp.,

(1983):

(1) whether either court has assumed jurisdiction over a res; (2) the inconvenience of the federal forum; (3) the desirability of avoiding piecemeal litigation; (4) the order in which the forums obtained jurisdiction; (5) whether federal law or state law controls; and (6) whether the state forum will adequately protect the interests of the parties.

Currie v . Group Ins. Comm’n,

, 10 (1st Cir. 2002).

This non-exhaustive list is to be used as a discretionary tool,

not a litmus test. Id.; see also Colorado River,

(“No one factor is necessarily determinative; a carefully

considered judgment taking into account both the obligation to

exercise jurisdiction and the combination of factors counselling

against that exercise is required.”).

The Court next sets forth the background of this action in

light of the standards for Burford and Colorado River abstention.

Background

By order dated June 1 3 , 2003, the Superior Court found that

The Home Insurance Company (“The Home”) was insolvent and ordered

that The Home be liquidated. Order of Liquidation, ¶ ( b ) ,

attached as Exhibit A to Pl.’s Mot. for Remand. The Commissioner

was appointed Liquidator of The Home.

The Order of

5 Liquidation further provides in relevant part that:

To the full extent of the jurisdiction of the Court and the comity to which orders of the Court are entitled, all persons are hereby permanently enjoined and restrained from any of the following actions:

(7) the setoff of any debt owing to The Home; provided, however, that notwithstanding anything in this Order to the contrary, nothing herein is intended nor shall it be deemed to stay any right of setoff of mutual debts or mutual credits by reinsurers as provided in and in accordance with RSA 402-C:34;1

Order of Liquidation, ¶ (n)(7).

In October 2003, the Commissioner commenced the instant

action in the Superior Court by filing a complaint requesting a

declaratory judgment. See Petition for Removal and attached

complaint (document n o . 1 ) . The Commissioner alleges in the

complaint that Wausau contends that it is entitled to offset

balances owed to The Home under reinsurance agreements against

balances allegedly owed to Wausau under reinsurance agreements

with U.S. International Reinsurance Company (“USI R e ” ) . Compl.,

¶ 1 6 . The Commissioner alleges that USI Re is an entity

1 N.H. Rev. Stat. Ann. (“RSA”) 402-C:34 provides that setoffs are permitted in connection with any action or proceeding under New Hampshire’s Insurers Rehabilitation and Liquidation Act, RSA 402-C:1 e t . seq., but only with regard to mutual debts or mutual credits between the insurer and another person and subject to challenge under specified exceptions.

6 “incorporated under the laws of New Hampshire and is the subject

of a Liquidation proceeding that is separate and distinct from

the Home Liquidation proceeding.” Compl., ¶ 7 . The Commissioner

claims that the offsets that Wausau seeks to make are not mutual,

and therefore are contrary to RSA 402-C:34 and the Superior

Court’s Order of Liquidation. Compl., ¶ 1 6 . The Commissioner

requests a declaratory judgment that no mutuality exists between

The Home and USI Re reinsurance agreements, and that Wausau is

not entitled to setoff debts owed to The Home against debts

allegedly owed to Wausau by USI R e . Prior to filing a responsive

pleading, Wausau removed the action to federal court on the basis

of diversity and federal question jurisdiction.

The Commissioner argues that remand is appropriate under the

Burford and Colorado River abstention doctrines because this

action arises as an integral part of the state’s liquidation

proceedings against an insolvent insurance company. He further

argues that since Wausau seeks to make a setoff that is not

founded on mutuality, Wausau is subject to the stay imposed by

the Superior Court’s liquidation order and must go to that court

for relief.

In its objection, Wausau responds that, as the Commissioner

7 acknowledges in the complaint, the purportedly non-mutual offsets

were the subject of a prior challenge by The Home that was

resolved in Wausau’s favor by binding arbitration several years

ago. See Compl., ¶ 9. According to Wausau, a threshold issue

presented in this case is whether the Commissioner is precluded

from relitigating the setoff issue. Wausau argues that such

issues are commonly decided by federal courts, implicate the

Federal Arbitration Act, and present no occasion for this Court

to apply the Burford or Colorado River abstention doctrine.

The Commissioner replies that Wausau’s objection

inappropriately focuses on the parties’ pre-insolvency relations.

The Commissioner contends that the commencement of the

liquidation proceeding against The Home invokes the application

of New Hampshire statutory law and the state court’s equitable

power to limit setoff rights in order to protect the rights of

creditors. Therefore, the Commissioner argues, the doctrine of

res judicata does not apply.

Discussion

I. The Court Has the Authority to Abstain

Based on the Court’s review of the Supreme Court’s decision

in Quackenbush, the Court finds that it has the authority to

8 abstain in this case. In Quackenbush, the Insurance Commissioner

for the State of California, as trustee for insolvent insurance

companies, brought an action against Allstate Insurance Company

in state court to recover reinsurance proceeds under common-law

tort and breach of contract theories.

. After

Allstate removed the action to federal court, the district court

remanded the case to state court based on Burford abstention.

The Court of Appeals for the Ninth Circuit vacated the

district court’s decision and ordered the case sent to

arbitration.

.

On further appeal, the Supreme Court recognized that “in

cases where the relief being sought is equitable in nature or

otherwise discretionary, federal courts not only have the power

to stay the action based on abstention principles, but can also,

in otherwise appropriate circumstances, decline to exercise

jurisdiction altogether by either dismissing the suit or

remanding it to state court.”

. Since the Insurance

Commissioner in Quackenbush sought tort and contract damages, the

Supreme Court affirmed the Ninth Circuit’s decision because the

relief sought in the district court was neither equitable nor

discretionary.

.

9 The facts of the instant case are distinguishable from

Quackenbush because the relief sought by the Commissioner in this

action, declaratory judgment, is discretionary. See

at 718-

719 (citing Wilton v . Seven Falls Co.,

7 7 , 282 (1995)

(federal courts have “discretion in determining whether and when

to entertain an action under the Declaratory Judgment Act, even

when the suit otherwise satisfies subject matter jurisdictional

prerequisites”)). Accordingly, the federal court has the power

to dismiss or remand this case if a recognized abstention

doctrine applies. Quackenbush,

.

II. Abstention Under the Burford Doctrine

A. Timely and Adequate State Court Review

The first consideration for abstention under the Burford

doctrine is whether timely and adequate state-court review of

this matter is available. The provisions of New Hampshire’s

Insurers Rehabilitation and Liquidation Act (“the Act”) give the

Superior Court the power to decide all issues relating to the

disposition of an insolvent insurance company’s assets. RSA 402-

C:4 (III), ( I V ) . Wausau does not dispute The Home’s assertion

that its reinsurance recoverables are assets. Therefore, the

Superior Court’s jurisdiction extends to the determination of

10 Wausau’s right to make setoffs that limit The Home’s assets.

Wausau has not asserted any basis for a finding that it could not

receive timely and adequate review of its preclusion defense in

the Superior Court, and this Court is not aware of any.

Accordingly, the Court finds that timely and adequate state court

review of this action is available.

B. Proceedings or Orders of a State Administrative Agency

In New Hampshire, liquidations of insolvent insurers are

governed by the Act and implemented by the Superior Court.

Therefore, there is an issue of whether the Burford doctrine

applies to this case since it does not involve an order of or

proceedings before a state administrative agency. See Fragoso v .

Lopez,

7 8 , 883 (1st Cir. 1993) (questioning whether

Burford abstention applies to an insolvent insurer being

liquidated under a state judicial structure rather than a state

administrative agency). Despite this apparent barrier, the

weight of the authority supports a finding that Burford

abstention may be applied in this context. See Quackenbush,

(“The fact that a state court rather than an agency

was chosen to implement California’s [regulatory scheme for the

insurance industry] provided more reason, not less, for the

11 federal court to stay its hand.”) (Kennedy, J., concurring);

Callon Petroleum C o . v . Frontier Ins. Co.,

0 4 , 209 (5th

Cir. 2003) (finding that federal courts normally manage the

conflict between their exercise of jurisdiction and state laws

establishing exclusive claim proceedings for insurance

insolvencies by abstaining under Burford); see also Feige v .

Sechrest,

(3d Cir. 1996) (finding that a district

court appropriately stayed an action seeking money damages under

the Burford doctrine during the pendency of a state court

proceeding to liquidate an insurer). Accordingly, the Court

assumes that Burford abstention could be applied in this action

because New Hampshire has established a comprehensive regulatory

scheme for the liquidation of insolvent insurers under the Act.

C. Difficult Questions of State Law

The Court next considers whether the instant action presents

“difficult questions of state law bearing on policy problems of

substantial public import whose importance transcends the result

in the case then at bar.” The issue presented in the

Commissioner’s declaratory judgment action is whether Wausau’s

challenged setoffs may be considered “mutual” within the meaning

of RSA 402-C:34. The Commissioner argues that the New Hampshire

12 statute requires “traditional mutuality” for setoffs during the

pendency of a liquidation proceedings, which the Commissioner

alleges does not exist for the setoffs Wausau seeks to make. The

Commissioner has not cited any New Hampshire authorities in

support of his position. Additionally, the Commissioner argues

that the Superior Court has the equitable power in a liquidation

proceeding to limit setoff rights that might otherwise be

available in order to effect the purpose of the Act.2 Again, the

Commissioner has not cited any New Hampshire authorities in

support of his position. The Court finds that these seemingly

unresolved issues present “difficult questions of state law

bearing on policy problems of substantial public import whose

importance transcends the result” in the instant case.

In opposing the Commissioner’s motion, Wausau argues that

the Burford doctrine should not be applied because the issue of

whether the prior arbitration awards in Wausau’s favor precludes

the Commissioner from asserting his non-mutuality claim does not

call for the exercise of equitable powers under state law or

implicate any paramount state interests. Wausau’s argument puts

2 RSA 402-C:1(IV) provides that: “The purpose of this chapter is the protection of the interests of insureds, creditors, and the public generally, with minimum interference with the normal prerogatives of proprietors,

13 the cart before the horse. Wausau may have a valid defense to

the Commissioner’s claim, but that does not mean that the

Commissioner’s claim ought not be heard by the state court in the

first instance where the Commissioner seeks a declaratory

judgment that involves an interpretation of a state insolvency

statute and the Superior Court’s equitable powers in a

liquidation proceeding.

Since the Court finds that Wausau has an opportunity for

timely and adequate review of its preclusion defense in the state

court, and that this action raises difficult questions of

substantial public import pertaining to the extent of setoff

rights in a liquidation proceeding, the Court finds that it would

be appropriate for the federal court to abstain in order for the

state court to determine in the first instance how RSA 402-C:34

and the Superior Court’s Order of Liquidation applies to these

facts.

III. Colorado River Abstention

The Commissioner also contends that Colorado River

abstention applies in this case. Colorado River abstention may

apply when there is concurrent state and federal litigation

involving essentially the same issues.

14 There is no doubt that there is a pending liquidation

proceeding in the state court pertaining to The Home. While the

Commissioner argues that the instant action arises as “an

integral part” of the liquidation proceedings, the action was

commenced by the Commissioner’s filing of a complaint, which

Wausau removed to federal court. Therefore, it does not appear,

as a technical matter, that this dispute is currently being

actively litigated in the state court. But the Commissioner is

expressly authorized under the Act to “[c]ollect all debts and

moneys due and claims belonging to the insurer,” RSA 402-C:25

( V I ) , and to institute actions in New Hampshire or elsewhere in

order to effect the purpose of the Act. See 402-C:25 ( V I ) ,

(XII), (XVII). Such actions are incidental to the liquidation

proceeding. Moreover, there is no question that the Superior

Court obtained jurisdiction over the liquidation of The Home

months before the instant action was commenced, and that the

Superior Court has jurisdiction over the instant dispute. And,

as discussed above, the Court finds that Wausau’s interests can

be adequately protected in the state forum. All of these factors

support the application of Colorado River abstention.

Most significantly, it appears that state law controls the

15 outcome of this dispute. The Commissioner contends that the New

Hampshire insolvency statute, and the state court’s equitable

powers in a liquidation proceeding, limit Wausau’s setoff rights.

In response, Wausau contends that federal law applies because it

argues that the prior arbitration awards in its favor are

governed by the Federal Arbitration Act (“FAA”). However, Wausau

does not address the application of the McCarran-Ferguson Act,

, et seq., to this action. Courts have held that a

party’s rights under the FAA are preempted by state laws

regulating the business of insurance pursuant to § 1012(b) of the

McCarran-Ferguson Act.3 See Munich Am. Reinsurance C o . v .

Crawford,

(5th Cir. 1998) (finding that state

laws regulating the business of insurance may suspend federal

remedies under the F A A ) ; Nat’l Home Ins. C o . v . King,

1 8 , 528-531 (E.D. Ky. 2003) (finding that a Kentucky

statute providing that arbitration clauses in insurance contracts

were not enforceable was exempt from preemption by the FAA by

3 Section 1012(b) provides that:

No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, . . , unless such Act specifically relates to the business of insurance.

16 virtue of the McCarran-Ferguson A c t ) ; see also, Quackenbush,

(finding that the district court was reasonably

concerned about the threat posed to state proceedings by

different state and federal rulings on a then-unresolved issue of

setoff rights and citing the McCarran-Ferguson Act) (Kennedy J.,

concurring). Because the Commissioner’s claim is based on the

interpretation of state laws regulating the business of insurance

that are not preempted by the FAA, the Court finds that state law

issues predominate in the instant action.

Weighing the relevant considerations, the Court finds that

Colorado River abstention applies to this action. This Court

does not express any opinion regarding the effect of prior

arbitration awards in Wausau’s favor on the Commissioner’s

ability to challenge the propriety of Wausau’s setoffs in light

of The Home’s liquidation. Wausau is free to assert its

entitlement to continue taking setoffs in the Superior Court.

See Munich Am. Reinsurance,

.

Conclusion

For the reasons set forth above, the Court finds that this

Court should abstain from hearing this matter based upon the

Burford and Colorado River abstention doctrines. Accordingly,

17 the motion for remand (document n o . 5 ) is granted. The Clerk of

Court is directed to remand this matter back to the Merrimack

County Superior Court.

SO ORDERED.

James R. Muirhead United States Magistrate Judge

Date: September 7 , 2004

cc: Peter C.L. Roth, Esq. Natasha C . Lisman, Esq. Doreen F. Connor, Esq.

18