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Riley v. Simmons

filed: January 20, 1995.

CHARLES N. RILEY; THELMA LEVINE; DR. DONALD I. SCHIFFMAN, ON BEHALF OF THEMSELVES AND ALL OTHERS SIMILARLY SITUATED
v.
TED D. SIMMONS; HENRY E. KATES; JOHN LLOYD HUCK; STEPHEN CARLOTTI; FRED E. BROWN; EDWARD MERRICK BULL; RAYMOND E. CARTLEDGE; JAMES E. FERLAND; ELLEN V. FUTTER; PAUL HARDIN; PETER HARRIS; THE ESTATE OF JOHN HARRISON KREAMER; ROCCO J. MARANO; JOSH WESTON, THELMA LEVINE, AND DONALD I. SCHIFFMAN, ON BEHALF OF THE UNCERTIFIED CLASS CONSISTING OF ALL PERSONS, EXCEPT DEFENDANTS, WHO PURCHASED OR OTHERWISE BENEFICIALLY ACQUIRED SECURITIES THAT WERE INCORRECTLY AND MISLEADINGLY LABELLED OR DESCRIBED AS ANNUITIES FROM MUTUAL BENEFIT LIFE INSURANCE COMPANY DURING THE PERIOD AUGUST 14, 1988 TO JULY 15, 1991, APPELLANTS



Appeal from the United States District Court for the District of New Jersey. (D.C. Civil Docket No. 91-cv-03626).

Present: Hutchinson and Nygaard, Circuit Judges, and Ludwig, District Judge*fn*

Author: Hutchinson

Opinion OF THE COURT

HUTCHINSON, Circuit Judge.

Appellants, Thelma Levine ("Levine") and Donald Schiffman ("Schiffman") (collectively "Plaintiffs"),*fn1 appeal an order of the United States District Court for the District of New Jersey dismissing their action without prejudice following the court's decision to abstain from considering their federal securities claims under Burford v. Sun Oil Co., 319 U.S. 315, 87 L. Ed. 1424, 63 S. Ct. 1098 (1943). Plaintiffs sought relief under the federal securities laws alleging misrepresentations that induced them to purchase certain annuities issued by Mutual Benefit Life Insurance Company ("Mutual Benefit" or the "Company"), an insolvent insurance company now in rehabilitation proceedings before the New Jersey Commissioner of Insurance (the "Commissioner" or the "Rehabilitator"). The district court permitted the intervention of the Commissioner for the limited purpose of filing a motion to dismiss Plaintiffs' complaint or, in the alternative, to stay the action pending the outcome of a separate state action commenced by the Commissioner in his role as the Rehabilitator of Mutual Benefit. The district court thereafter concluded that continuation of Plaintiffs' action at this time would conflict with the ongoing state rehabilitation proceedings. It also concluded that Plaintiffs could receive "timely and adequate state court review" of all their claims, including the federal securities claims, because all of these claims were essentially grounded in fraud. From these premises, the district court determined that Burford abstention counseled against continuation of Plaintiffs' case at this time and dismissed Plaintiffs' action without prejudice subject to possible reconsideration following the completion of the Commissioner's rehabilitation efforts.

Because federal jurisdiction over one of the claims is exclusive and there is an independent basis for federal jurisdiction over the remaining claims, all of which may belong directly to the Plaintiffs, we hold that the district court erred when it concluded that there is an opportunity for timely and adequate state court review of Plaintiffs' federal securities claims. We will therefore reverse the district court's order dismissing Plaintiffs' case without prejudice and remand for further proceedings consistent with this opinion.*fn2

I. Factual & Procedural History

A. General Background

Mutual Benefit was established in 1845. As of July 1991, it was one of the country's largest life insurance companies, with approximately 700,000 policyholders and annuitants and assets approaching $14 billion.

Until the late 1970's Mutual Benefit was a relatively conservative institution, known as "the Tiffany of the insurance industry." In the late 1970s, and early 1980s, however, Mutual Benefit, like other insurance companies, began to expand its products beyond the traditional life insurance policy. It marketed and sold a variety of annuity contracts, including premium deferred annuities, flexible annuities and guaranteed investment contracts. It began to speculate in high-risk ventures and to unduly concentrate its holdings in real estate.

This speculation and excessive investment in real estate eventually led credit agencies to downgrade Mutual Benefit's credit rating. Thereafter, in the first half of 1991, Mutual Benefit's customers withdrew $500 million from the Company. These withdrawals were projected to reach $1 billion by the end of the year.

B. New Jersey Rehabilitation Proceedings

On July 16, 1991, New Jersey's Attorney General, with the consent of Mutual Benefit's Board of Directors, asked the Superior Court of New Jersey, Chancery Division for Mercer County (the "state court") to place Mutual Benefit in rehabilitation under the supervision of the Commissioner. The state court granted the request, appointed the Commissioner Rehabilitator of Mutual Benefit and vested him with all the powers available under New Jersey's version of the Uniform Insurers Liquidation Act (the "UILA"), N.J. Stat. Ann. §§ 17B:32-1 to 17B:32-30 (West 1985) (repealed 1992). See In re Rehabilitation of Mutual Benefit Life Ins. Co., No. C-91-00109, slip op. at 2 (N.J. Super. Ct. Ch. Div. July 16, 1991) (the "Rehabilitation Order").*fn3

The Rehabilitation Order granted the Commissioner exclusive title, possession to, and control over Mutual Benefit's assets. Id. at 4. It enjoined all persons from interfering in any way with the Commissioner in the discharge of his rehabilitation duties or in his possession of the property and assets of Mutual Benefit, including any causes of action belonging to the Company. Specifically, the Rehabilitation Order provides that:

All officers, directors, policyholders, agents, and employees of Mutual Benefit and all other persons or entities of any nature, including but not limited to claimants, holders of annuity contracts, beneficiaries under any Mutual Benefit contract, plaintiffs or petitioners in any action against Mutual Benefit . . . having claims of any nature against Mutual Benefit including crossclaims, counterclaims and third party claims, are hereby enjoined and restrained from:

b. bringing, maintaining or further prosecuting any action at law, suit in equity, special or other proceeding against Mutual Benefit, its estate in receivership or against the Commissioner and his successors in office, as Rehabilitator thereof . . . ;

c. making or executing any levy upon the property or estate of Mutual Benefit;

e. interfering in any way with the Commissioner, or any successors in office, in his possession of or title to the property and assets of Mutual Benefit, or in the discharge of his duties as Rehabilitator thereof, pursuant to this Order. All persons or entities of any nature other than the Rehabilitator, are hereby restrained from commencing any direct or indirect actions against any reinsurer of Mutual Benefit for proceeds of any reinsurance policies issued to . . . or other agreements with, Mutual Benefit.

Id. at 5-7. On August 7, 1991, the state court entered an order continuing the Commissioner's appointment as Mutual Benefit's Rehabilitator. In re Rehabilitation of Mutual Benefit Life Ins. Co., No. C-91-00109 (N.J. Super. Ct. Ch. Div. Aug. 7, 1991).

On March 20, 1992, the state court authorized the Commissioner to extend Mutual Benefit's $20 million executive liability policy (the "D & O Policy"). Mutual Benefit paid a $1 million premium in order to extend this policy. As partial consideration for this premium, the extended policy was construed to cover actions brought by the Commissioner against the former directors and officers of Mutual Benefit despite an exclusion in the original policy for actions by one insured against other insureds. In re Rehabilitation of Mutual Benefit Life Ins. Co., No. C-91-00109 (N.J. Super. Ct. Ch. Div. Mar. 20, 1992) (order extending indemnification and reconsidering the decision denying extension of insurance).

In late 1991, the Commissioner's financial analysis of Mutual Benefit showed that, as of June 30, 1991, the Company's assets had a going concern value that was only about 88% of its liabilities.*fn4 The Commissioner's report estimated the liquidation value of the Company, on a six month basis, at 55% of its liabilities.

On August 3, 1992, the Commissioner submitted a Plan of Rehabilitation to the state court. This plan (the "Rehabilitation Plan") guarantees full death, disability and retirement benefits and restructures permanent life policies and other contracts into non-participating universal contracts with minimum guaranteed interest rates. The Rehabilitation Plan also restricts withdrawals during a rehabilitation period ending December 31, 1999. In re Rehabilitation of Mutual Benefit Life Ins. Co., No. C-91-00109, slip op. at 23-28 (N.J. Super. Ct. Ch. Div. Aug. 12, 1993).

Under the Rehabilitation Plan, policyholders would recover 88% of the present value of their July 1991 account balances. The Plan provides an alternative opt out provision entitling policyholders to immediate payment of 55% of the value of their original account.

The state court held hearings on the Rehabilitation Plan over a four month period beginning in January 1993. The court's opinion, issued August 12, 1993, affirms the Rehabilitation Plan in most respects. Appeals from that order have been filed in state court.

During the rehabilitation process, the Commissioner investigated the causes of Mutual Benefit's collapse. On July 8, 1993, the Commissioner filed a complaint in the state court on behalf of "Mutual Benefit, its policyholders, creditors and other interested parties" against thirty-eight named defendants, including many of the officers and directors who managed the Company from 1979 through 1991, Appellants' Appendix ("App.") at 449, and the Company's outside accountants, Ernst & Young. The complaint alleges theories of recovery based on negligence, breach of fiduciary duty, fraud, waste and violations of New Jersey's Consumer Fraud Act, N.J. Stat. Ann. §§ 56:8-1 to 56:8-48 (West 1989 & Supp. 1994). In the state court action, the Commissioner seeks to recover damages for the benefit of Mutual Benefit's estate and "to recover, particularly for the benefit of Mutual Benefit's policyholders who have priority in the distribution of Mutual Benefit's assets, damages . . . which have resulted in loss to the Company and diminution in the value of the insurance policies and other investments held by some 700,000 policyholders and annuitants." App. at 449.

The Commissioner's complaint alleges that the former directors and officers of Mutual Benefit mismanaged the Company by investing too much of the Company's assets in real estate, particularly high risk real estate projects, and by investing in leveraged buy-outs. The complaint also alleges that the directors and officers made material misrepresentations to Mutual Benefit's policyholders and annuitants regarding the financial condition of the Company.

C. New Jersey State Class Actions

On July 17, 1991, one day after the state court placed Mutual Benefit in rehabilitation, the first of six state class actions was filed. The other five class actions were filed within the week, and the state court eventually consolidated all six into one action.

The state class action complaints are similar to the Commissioner's complaint. They allege excessive investment in high-risk, non-performing real estate ventures and leveraged

buy-outs, as well as public misrepresentations concerning Mutual Benefit's financial condition. They assert claims for fraud, negligent misrepresentation, breach of fiduciary duty, and negligence.

The various plaintiffs in the state class actions moved for class certification. The Commissioner opposed class certification and sought dismissal of the action on the ground that the Commissioner had standing to bring the claims asserted therein and that ...


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