Appeal from the United States District Court for the Eastern District of Pennsylvania; D.C. Civil No. 89-06289.
Mansmann, Alito and Garth, Circuit Judges.
This appeal arises from a class action filed in the district court for the Eastern District of Pennsylvania by certain policyholders of an insolvent insurance company, The Mutual Fire, Marine and Inland Insurance Company ("Mutual Fire"), against Mutual Fire's independent auditor, seeking damages allegedly resulting from the auditor's false and misleading certification of the insurer's financial statements. The district court, after permitting the state insurance commissioner to intervene for the purpose of filing a motion to dismiss, granted that motion and dismissed the complaint. As the basis for its dismissal, the district court cited the abstention doctrine announced in Burford v. Sun Oil Co., 319 U.S. 315, 63 S. Ct. 1098, 87 L. Ed. 1424 (1943), which permits federal courts in limited circumstances to abstain from exercising their jurisdiction over a case in order to avoid disruption of an important and complex state regulatory system.
Subject matter jurisdiction of this case derives from 28 U.S.C. § 1331 and 18 U.S.C. § 1964(c). We have appellate jurisdiction, under 28 U.S.C. § 1291, from the district court's order of May 9, 1990, granting the intervenor's motion to dismiss and denying as moot plaintiffs' motion for a preliminary and permanent injunction.
The primary question on this appeal is whether the district court correctly abstained under Burford. For the reasons that follow we believe that Burford abstention does not extend to actions such as the one before us. We will therefore vacate the district court's order of dismissal and remand for further proceedings.
Appellants University of Maryland at Baltimore and three other named plaintiffs (collectively, "the policyholders") brought this case as a class action against Peat, Marwick, Main & Co. ("PMM"), on behalf of over 20,000 individuals, businesses and public institutions who hold insurance policies issued by Mutual Fire. The district court has not as yet ruled on class certification. The policyholders alleged that Mutual Fire's publicly filed, audited financial statements were materially false and misleading and that Mutual Fire's independent auditor, PMM, wrongfully gave unqualified auditor's opinions, certifying without adequate basis that those statements fairly presented Mutual Fire's financial condition. The appellants further alleged that Mutual Fire's financial statements, as certified by PMM, falsely showed that Mutual Fire had adequate financial resources to honor its obligations; that Mutual Fire is now insolvent and in receivership; that the policyholders relied on PMM's representations and would have transferred their risks to a financially sound insurance company if they had known of Mutual Fire's unsound status; and consequently that the policyholders were injured by PMM's actions.
The Pennsylvania Insurance Commissioner, Constance B. Foster, in her capacity as the statutory receiver (or "rehabilitator") of Mutual Fire,*fn1 was permitted to intervene for the limited purpose of moving to dismiss the complaint. The Commissioner listed several grounds in support of the motion to dismiss, among which was the doctrine of federal court abstention. PMM also filed a motion to dismiss.
On May 9, 1990, the district court for the Eastern District of Pennsylvania granted the Commissioner's motion to dismiss.*fn2 The district court stated that it was applying the doctrine of abstention established in Burford v. Sun Oil Co., 319 U.S. 315, 63 S. Ct. 1098, 87 L. Ed. 1424 (1943), which it summarized as follows:
Where a state has created a complex regulatory scheme which is supervised by state courts and central to state interests, abstention is appropriate if despite federal jurisdiction there are primarily state issues involved, and if federal jurisdiction will disrupt a state's efforts "to establish a coherent policy with respect to a matter of substantial state concern."
Dist. Ct. Op., 736 F. Supp. at 643, (quoting Lac D'Amiante du Quebec v. American Home Assurance Co., 864 F.2d 1033, 1043 (3rd Cir. 1988)). As the basis for its decision to apply Burford abstention, the district court cited Pennsylvania's regulation of the insurance industry, the Pennsylvania Commonwealth Court's authority to preside over the rehabilitation of Mutual Fire, and the pendency of a suit by the Commissioner (on behalf of Mutual Fire) against PMM.
Although Pennsylvania has created a "complex regulatory scheme" to govern insolvencies of insurance carriers -- an issue which is at least arguably "central to state interests" -- the instant suit is not against Mutual Fire itself (the company subject to the state's "complex regulatory scheme"), but rather against the company's independent auditors, PMM. As the district court recognized, see 736 F. Supp. at 645, it would go beyond the usual scope of Burford abstention to decline jurisdiction in such a case. Nonetheless, the district court believed that permitting the present federal action to continue would interfere with the ongoing state rehabilitation proceeding of Mutual Fire. The district court could find no "compelling justification for two courts to be sitting in judgment over the question of what Peat Marwick did or did not do which contributed to the fall of Mutual Fire." Dist. Ct. Op., 736 F. Supp. at 646.
On December 4, 1986, the Insurance Commissioner petitioned in the Commonwealth Court of Pennsylvania to place Mutual Fire in rehabilitation under Article V of the Pennsylvania Insurance Department Act, 40 Pa. Stat. Ann. § 221.1 et seq. (Purdon's). On December 8, 1986, pursuant to 40 Pa. Stat. Ann. § 221.15, the Commonwealth Court placed Mutual Fire in rehabilitation and appointed the Insurance Commissioner or her successor as receiver of Mutual Fire.*fn3 The Commissioner's proposed rehabilitation plan, filed with the Commonwealth Court, was approved (as modified) on January 23, 1990. An appeal of the plan to the Pennsylvania Supreme Court is pending. The plan apparently provides for the filing of certain claims by policyholders against Mutual Fire, but will permit only partial recovery of the policyholders' damages.
The Commissioner has also brought her own suit, on behalf of Mutual Fire, against PMM (in the Commonwealth Court). The plaintiffs in the present action, however, argue that the Commissioner's suit and this suit are fundamentally different. The two suits differ both as to the class of persons on behalf of whom the suits are brought and as to the specific causes of action alleged against PMM.
The instant action, insofar as it sought certification of a class, was brought on behalf of policyholders who bought insurance policies from Mutual Fire between July 1, 1980 and April 30, 1986. The designated class would specifically exclude holders of surety bonds in connection with loans involving real estate, oil, and gas investments, and insurance or underwriting entities reinsured by Mutual Fire. Mutual Fire itself, moreover, is not a party to the policyholders' action. The Commissioner's Commonwealth Court action, by contrast, was brought on behalf of Mutual Fire itself, as well as all of its policyholders and insureds, all other creditors and interested parties, and the general public.
The two cases also differ in the causes of action stated. The amended complaint in the action before us contains six counts, including a RICO claim. The Commissioner's suit against PMM contains three counts: it does not encompass the RICO claims alleged in the instant action, nor does it allege the breach of any duty that PMM owed directly to the policyholders, creditors, or the public. It is brought by the Commissioner in her capacity as representative of Mutual Fire, and seeks damages only for PMM's alleged breach of duties owed to Mutual Fire.
The plaintiffs argue that since the Commissioner did not, and cannot, assert the policyholders' direct claims against PMM in her suit in Commonwealth Court, the district court had no discretion to abstain in favor of the Commonwealth Court.
The plaintiffs further argue that PMM's liability to the plaintiffs is not within the Commonwealth Court's limited jurisdiction. Therefore, they conclude, Pennsylvania has not attempted to establish a coherent and complex regulatory policy concerning claims against the former auditors of insolvent insurance companies, and thus Burford abstention is inappropriate. Moreover, they argue, it would clearly be inappropriate for the district court to abstain in favor of a court that does not have jurisdiction to hear plaintiffs' claims. Finally, they argue that Burford abstention encompasses only actions for equitable or declaratory relief, not common-law or monetary actions.
The intervenor-appellee (the Commissioner) argues that this case is an effort by some of the creditors of Mutual Fire to frustrate the Commissioner's efforts to obtain control over a "substantial asset" of Mutual Fire's -- i.e. the claim against PMM -- so that these policyholders may gain a preference over other creditors in the distribution of Mutual Fire's assets. The Commissioner's concern is that if the policyholders are allowed to proceed, the estate might lose "its largest asset -- the $350 million claim against Peat Marwick." Brief of Intervenor-Appellee at 11. Permitting these policyholders to pursue their separate claim against PMM, she argues, would frustrate Pennsylvania's statutory scheme to regulate insolvent insurance companies.
The Commissioner also argues that the Pennsylvania regulations governing the insurance industry include provisions affecting auditors, and therefore that suits against Mutual Fire's auditors fall within a state regulatory scheme of the type that Burford abstention is designed to protect. She also disputes the policyholders' assertion that the Commonwealth Court does not have jurisdiction over their claims against PMM. Finally, the Commissioner urges that even if Burford abstention is inappropriate, other principles (Colorado River abstention*fn4 and general principles of comity) dictate abstention.
Defendant-Appellee Peat Marwick argues that the judgment of the district court should be affirmed, but on different grounds than were used by that court. In essence, PMM seeks to turn the Burford dismissal into a dismissal on the merits. PMM argues, although the district court did not so hold, that the absence of privity between the policyholders and PMM is fatal to the plaintiffs' complaint, that there is no proximate causation by PMM of the tort injuries alleged, that the civil RICO count fails properly to state a claim, and that the policyholders' claims are time-barred. All of these substantive defenses bypass ...