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Memorial Hosp. v. Merrill Lynch

argued: August 10, 1993.

GEORGE F. GRODE, INSURANCE COMMISSIONER OF THE COMMONWEALTH OF PENNSYLVANIA
v.
THE MUTUAL FIRE, MARINE AND INLAND INSURANCE COMPANY CYNTHIA M. MALESKI, ACTING INSURANCE COMMISSIONER OF THE COMMONWEALTH OF PENNSYLVANIA, AS ACTING REHABILITATOR OF THE MUTUAL FIRE, MARINE & INLAND INSURANCE CO. V. BRITTANY INSURANCE COMPANY; BELVEDERE UNDERWRITING AGENTS, LTD.; BELVEDERE UNDERWRITING AGENTS, LTD. FOR AND ON BEHALF OF BELVEDERE INSURANCE COMPANY BRITTANY INSURANCE COMPANY, LTD. APPELLANT IN NO. 93-1128 BELVEDERE INSURANCE COMPANY, LTD. APPELLANT IN NO. 93-1129



Appeal from the United States District Court for the Eastern District of Pennsylvania. D.C. Nos. 92-05954 and 92-05955.

Before: Scirica, Cowen, and Rosenn, Circuit Judges.

Author: Rosenn

Opinion OF THE COURT

ROSENN, Circuit Judge.

This case raises a question whether under abstention doctrines a federal court may surrender jurisdiction to a state court of an ordinary contract claim initially brought in a state court in behalf of an insolvent insurance company and removed to a federal district court by foreign defendants on grounds of diversity.

The facts and procedural history are not complex and we recite only those necessary to dispose of the narrow issue before us. Cynthia M. Maleski is the Insurance Commissioner of the Commonwealth of Pennsylvania and the State Statutory Rehabilitator*fn1 of the Mutual Fire, Marine and Inland Insurance Company (Mutual Fire). Mutual Fire is a mutual property, casualty, and special risk insurance company organized under the laws of the Commonwealth of Pennsylvania. It has accrued a deficit exceeding $400,000,000 which has been described as one of the largest insurer insolvencies in the history of the United States.

The Commonwealth Court of Pennsylvania (Commonwealth Court) entered an Order of Rehabilitation, pursuant to which the Rehabilitator has taken control of the assets and affairs of Mutual Fire. The Rehabilitator has proposed a comprehensive plan of rehabilitation to remedy Mutual Fire's financial condition. Belvedere Insurance Company, Ltd. (Belvedere) and Brittany Insurance Company Ltd. (Brittany) are Bermuda corporations (hereinafter referred to as the Bermuda Corporations), with their principal places of business located in Hamilton, Bermuda. The Insurance Commissioner brought suit in the Commonwealth Court of Pennsylvania against the Bermuda Corporations, alleging that in the aggregate they had failed to pay almost $5,000,000 to Mutual Fire owed under numerous reinsurance contracts (the treaties) between the Bermuda Corporations and Mutual Fire. Thereafter, the Commissioner filed in the Commonwealth Court Petitions to Compel Payment of Current Obligations Past Due [by the Bermuda Corporations] in accordance with the Plan of Rehabilitation. On October 15, 1992, the Bermuda Corporations successfully petitioned for removal of the cases to the United States District Court for the Eastern District of Pennsylvania.

The Bermuda Corporations contended that the treaties under which they allegedly owed monies to Mutual Fire contained broad arbitration clauses. Consequently, on October 27, 1992, they moved that the district court compel arbitration in this matter pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the Convention), 9 U.S.C.A. §§ 201 -08 (West 1970 and Supp. 1993), and the Federal Arbitration Act (FAA), 9 U.S.C.A. §§ 1 et seq. (West 1970 and Supp. 1993). The Commissioner and Mutual Fire filed a cross-motion, urging, inter alia, that the district court refrain under federal abstention doctrines from exercising jurisdiction over this case.

On January 14, 1993, the district court denied the motion to compel arbitration. Instead, it granted the cross-motion to abstain, and remanded the case to the Commonwealth Court. The Bermuda Corporations timely appealed to this court. We reverse.

I.

The essence of the issue before this court is not whether the underlying dispute between the Bermuda Corporations and Mutual Fire is subject to mandatory arbitration, an issue which the district court did not decide, but whether the district court properly abstained from exercising jurisdiction. Thus, on appeal we need not determine whether the district court should have compelled arbitration, but simply whether the district court improperly surrendered federal jurisdiction after the Bermuda Corporations removed the litigation to the district court. Consequently, we need not address the numerous arguments raised by the parties pertaining to the applicability of the FAA and the Convention to this case.

Because the district court in this case abstained from exercising jurisdiction believing four types of federal abstention applied, a brief statement of the origin of the abstention doctrine and its development over the past half century may be helpful. Although abstention has its roots in the Supreme Court's decision in Ex Parte Young, 209 U.S. 123, 52 L. Ed. 714, 28 S. Ct. 441 (1908), it was not until 1941 that the doctrine achieved full expression in Railroad Commissioner v. Pullman Co., 312 U.S. 496, 61 S. Ct. 643, 85 L. Ed. 971 (1941). Note, Abstention: An Exercise in Federalism 108 U.Pa.L.Rev. 226, 227 (1959). Pullman abstention directs that federal courts should abstain from rendering a decision "when difficult and unsettled questions of state law must be resolved before a substantial federal constitutional question can be decided." United Services Auto. Ass'n. v. Muir, 792 F.2d 356, 361 (3d Cir. 1986), cert. denied, 479 U.S. 1031, 93 L. Ed. 2d 830, 107 S. Ct. 875 (1987) (quoting Hawaii Housing Authority v. Midkiff, 467 U.S. 229, 236, 81 L. Ed. 2d 186, 104 S. Ct. 2321 (1984)). Pullman abstention is not an issue in this case and it was not one of the types of abstention relied on by the district court. We, therefore, will not further discuss it.

The other three types of abstention are the Burford abstention, Colorado River abstention, and Younger abstention. The district court in the instant case relied on all three of these types of abstention, as well as on Louisiana Power & Light Co. v. Thibodaux, 360 U.S. 25, 3 L. Ed. 2d 1058, 79 S. Ct. 1070 (1959), which it characterized as a fourth type of abstention.

The Burford abstention, first enunciated by the Supreme Court in Burford v. Sun Oil Co., 319 U.S. 315, 87 L. Ed. 1424, 63 S. Ct. 1098 (1943), just two years after Pullman, held that federal courts should exercise equitable discretion and refrain from exercising authority over questions involving basic problems of state policy pertaining to the regulation of important state natural resources, even if federal court jurisdiction is predicated on diversity of citizenship. The Court subsequently observed in Colorado River Water Conservation District. v. United States, 424 U.S. 800, 47 L. Ed. 2d 483, 96 S. Ct. 1236 (1975):

Where the State had established its own elaborate review system for dealing with the geological complexities of oil and gas fields, [federal] review would have had an impermissibly disruptive effect on state policy for the management of those fields.

Id. at 815. Burford abstention is usually applied to state regulatory matters such as establishing rates for natural gas or transportation, discontinuing railroad passenger services, Alabama Public Service Commission v. Southern Railway, 341 U.S. 341, 95 L. Ed. 1002, 71 S. Ct. 762 (1951), discontinuing intrastate air service, Allegheny Airlines v. Pennsylvania Pub. Util. Com'n, 465 F.2d 237 (3d Cir), cert. denied 410 U.S. 943, 35 L. Ed. 2d 609, 93 S. Ct. 1367 (1973), or applying state eminent domain procedures, Ahrensfeld v. Stephens, 528 F.2d 193 (7th Cir. 1975).

In Colorado River, the Court enunciated a somewhat related doctrine that allowed a federal court to abstain in a case involving complicated Indian tribe water rights where Congress enacted legislation granting state court jurisdiction. The Court concluded that the federal legislation "bespeaks a policy that recognizes the availability of comprehensive state systems for adjudication of water rights as the means for achieving these goals," which, together with other exceptional circumstances, indicated the propriety of federal abstention. Colorado River, 424 U.S. at 819. Among the exceptional circumstances to be considered by a federal court, in the event of an exercise of concurrent jurisdiction are:

The inconvenience of the federal forum; the desirability of avoiding piecemeal litigation; and the order in which jurisdiction was obtained by the concurrent forums. 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 ...


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