ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA. (D.C. Civil Action No. 89-06289).
Before: Becker, Scirica*fn* and Nygaard, Circuit Judges.
When Mutual Fire, Marine & Inland Insurance Company went into statutory rehabilitation, it triggered various insolvency proceedings and suits in state and federal courts, and satellite litigation concerning the conduct of some attorneys in the proceedings. The Commonwealth Court of Pennsylvania primarily dealt with Mutual Fire's insolvency. While that was progressing, four individually named plaintiffs filed a class action in federal district court against Peat, Marwick, Main & Company, alleging that Peat Marwick performed materially deficient audits of Mutual Fire. The plaintiffs pleaded various causes of action based on state law and a violation of the Racketeer Influence and Corrupt Organizations Act (RICO), 18 U.S.C. § 1961 et seq.
The attorneys who instituted this action, Richard Brown and his law firm Spiegel & McDiarmid (the plaintiffs' attorneys), had participated in Mutual Fire's rehabilitation proceedings. Since they were bound by various supervisory and confidentiality orders issued by the Commonwealth Court in the insolvency proceedings, and since they may have violated these orders by filing this action, the Insurance Commissioner of Pennsylvania, acting in her capacity as Mutual Fire's statutory receiver, brought state contempt proceedings against them.
After we reversed the district court's decision to abstain under the Burford abstention doctrine, the district court denied the plaintiffs' motion for Rule 11 sanctions and their attorneys' motion for injunctive relief against the state contempt proceedings. It then granted Peat Marwick's motion to dismiss the complaint for failure to state a claim. The plaintiffs and their attorneys appeal. We will reverse that portion of the district court's order dismissing the state claims with prejudice and affirm the balance.
In 1986, the Commonwealth Court ordered Mutual Fire into rehabilitation and appointed the Insurance Commissioner as statutory receiver. The rehabilitation order prohibited any actions against Mutual Fire or its property in any court in Pennsylvania.
At the request of five corporate policyholders, two of whom were represented by Attorney Brown, the Commonwealth Court established a Committee of Policyholders and authorized the Committee's costs, including attorney's fees, to be charged to Mutual Fire's estate. The court later issued a supervisory order declaring its exclusive jurisdiction "to hear and determine all disputes concerning claims and the collection of assets of Mutual Fire." It also issued a confidentiality order requiring all information submitted by Peat Marwick to "be used solely for purposes of the Mutual Fire rehabilitation and/or liquidation proceedings." Attorney Brown was bound by this order.
Attorney Brown and the accounting firm of Price Waterhouse, whom he had hired as a consultant, investigated the claims against Peat Marwick. He and Price Waterhouse submitted bills in excess of $2 million to Mutual Fire's estate. The Commonwealth Court eventually dissolved the Committee, concluding that its costs to the Mutual Fire's estate could no longer be justified. Grode v. Mutual Fire, Marine & Inland Ins. Co., 132 Pa. Commwlth. 196, 572 A.2d 798, 810-11 (1990).
In 1988, the Insurance Commissioner, Constance Foster, filed a Praecipe for Writ of Summons against Peat Marwick in connection with its audits of Mutual Fire's books. She selected the law firm of Rose, Schmidt, Hasley & DiSalle to prosecute the action. Rose Schmidt filed a complaint with the Commonwealth Court, alleging that Peat Marwick improperly reported Mutual Fire's financial conditions for several years and estimating shareholders' damages to be over $350 million.
In 1989, without notice to the Commonwealth Court or the Commissioner, the plaintiffs' attorneys filed this class action against Peat Marwick on behalf of the University of Maryland at Baltimore, Andrew Burgess, M.D., Sea Quest, Inc., and the School Board of Palm Beach County, who collectively sought to represent some 20,000 Mutual Fire policyholders. The plaintiffs alleged that Peat Marwick performed materially deficient, false and misleading financial audits of Mutual Fire and without reasonable basis certified Mutual Fire's financial statements. Those statements represented that Mutual Fire was adequately financed when it was not. The Commissioner filed a similar suit in the Commonwealth Court against Peat Marwick on behalf of, among others, Mutual Fire and its policyholders for breach of contract, negligence, malpractice, and misrepresentation. The plaintiffs then amended their complaint to allege negligence per se, fraud, negligent misrepresentation, negligence, actions in concert, and a violation of RICO.
The Commissioner simultaneously sought leave to intervene in the district court, and filed a petition in the Commonwealth Court for a rule upon plaintiffs' attorneys to show cause why they should not be held in contempt for filing this federal suit, which she contended ...