United States Court of Appeals,
Fifth Circuit.
No. 96-10349
Summary Calendar.
Richard W. CLARK; Clark & Company, Inc.; and John Doe, Cecil
Morgan, Plaintiffs-Appellants,
v.
Michael J. FITZGIBBONS, Individually and as Receiver for American
Bonding Company; and American Bonding Company, in receivership,
Defendants-Appellees.
Feb. 14, 1997.
Appeal from the United States District Court for the Northern
District of Texas.
Before HIGGINBOTHAM, WIENER and BENAVIDES, Circuit Judges.
BENAVIDES, Circuit Judge:
American Bonding Co. ("ABC") is an Arizona insurance company
placed in receivership by order of the Arizona Superior Court.
Appellants asserted various state law claims against ABC and the
Arizona special deputy receiver, Michael J. FitzGibbons. The
district court dismissed the action on two grounds. First, the
district court gave full faith and credit to the receivership order
of the Arizona court, which required all persons with claims
against ABC to bring those claims before the receiver. Second, the
district court deferred to the Arizona receivership proceeding
under the abstention doctrine of Burford v. Sun Oil Co., 319 U.S.
315, 63 S.Ct. 1098, 87 L.Ed. 1424 (1943).
Finding Burford abstention appropriate and appellants' full
faith and credit argument unpersuasive, we affirm.
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I.
The complaint states that Richard W. Clark is a Texas resident
and an officer and director of Clark & Co., a Texas insurance
agency. As a managing general insurance agent, Clark & Co. entered
agreements in the early 1990s to administer insurance policies
issued by two Texas insurance companies and reinsured by ABC. It is
undisputed that at all relevant times, ABC was an Arizona
corporation authorized to engage in the business of insurance in
that state and properly subject to the regulatory oversight of the
Arizona director of insurance. ABC also was authorized to write
insurance policies in Texas as a "foreign insurance company." TEX.
INS.CODE ANN. art. 21.43 (Vernon 1981 & Supp.1996). However, the
policies at issue in this appeal were issued by the two Texas
companies and not by ABC.1 The insured under these policies were
individual Texas residents.
The complaint alleges that in 1994, ABC fell behind in its
alleged financial obligations to the Texas policyholders. The
Arizona Department of Insurance assumed supervision of ABC and
1
The Texas companies, State and County Mutual Fire Insurance
Co. and Guaranty County Mutual Insurance Co., are classified as
county mutual insurance companies under Chapter 17 of the Texas
Insurance Code. Although county mutual companies are generally
exempt from the insurance laws of Texas, see TEX. INS.CODE ANN. art.
17.22, they are nonetheless governed by state law and subject to
the oversight of the Texas Board of Insurance Commissioners. See,
e.g., TEX. INS.CODE ANN. art. 17.18 (biennial examination).
Appellants accuse ABC of using the county mutual companies as
"fronts" to sell insurance in Texas, virtually unregulated. It is
undisputed, however, that the Texas policies were written by the
county mutual companies. ABC contends that it was not the de facto
insurer of the Texas policyholders, inasmuch as it contracted only
as reinsurer of the policies issued by the Texas companies.
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appointed FitzGibbons as supervisor. FitzGibbons allegedly agreed
to continue paying ABC's obligations in Texas, including claims due
to individual policyholders and fees and commissions owed to Clark
and the Clark agency. The complaint alleges that FitzGibbons
breached these promises.
Insurance regulators in Arizona and California, observing
ABC's slide toward insolvency, took action in early 1995. The
Arizona director of insurance initiated legal proceedings against
ABC in an effort to rehabilitate the company and safeguard the
rights of its creditors. On February 2, 1995, the Arizona Superior
Court placed ABC in receivership and appointed the state director
of insurance as receiver. The court named FitzGibbons special
deputy receiver and ordered that all claims against ABC must be
filed with him. The state court asserted its exclusive
jurisdiction over ABC's property and assets.
Notwithstanding the state court injunction, appellants filed
suit against ABC and FitzGibbons in United States District Court
for the Northern District of Texas on August 11, 1995. The
complaint asserted claims for breach of contract, indemnification,
breach of fiduciary duty, and breach of the duty of good faith and
fair dealing. The action was framed in part as a putative class
action, with Richard Clark as named plaintiff representing the
interests of various John Doe plaintiffs, the individuals insured
through the Clark agency whose policies were reinsured by ABC. The
plaintiffs variously sought compensatory damages, exemplary
damages, and an injunction to prevent ABC from "[m]isappropriating
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or using funds which should lawfully be applied to pay for the
claims incurred and damages sustained by the Doe plaintiffs."
Plaintiffs appeal the dismissal of the action.
II.
Jurisdiction in the district court was premised upon diversity
of citizenship. 28 U.S.C. § 1332. We have jurisdiction to review
the district court's final order of dismissal. 28 U.S.C. § 1291.
III.
We review a district court's decision to abstain for abuse of
discretion, taking care to ensure that the decision fits "within
the narrow and specific limits prescribed by the particular
abstention doctrine involved." American Bank and Trust Co. of
Opelousas v. Dent, 982 F.2d 917, 922 n. 6 (5th Cir.1993) (internal
citation and quotation marks omitted).
IV.
The Burford doctrine provides for abstention in deference to
complex state administrative procedures. Insurance companies are
ineligible for the protections afforded by the federal Bankruptcy
Code. 11 U.S.C. § 109. Instead, insolvent insurers are subject to
the comprehensive oversight of state administrative agencies and
courts. See, e.g., ARIZ.REV.STAT. ANN. § 20-611 et seq. Federal law
consigns to the states the primary responsibility for regulating
the insurance industry. See 15 U.S.C. § 1011-15 (McCarran-Ferguson
Act); Barnhardt Marine Ins., Inc. v. New England Int'l Sur. of
America, Inc., 961 F.2d 529, 531 (5th Cir.1992).
Against this backdrop, allowing a creditor or claimant to
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proceed against an insolvent insurer in federal court while a state
insolvency proceeding is pending would "usurp [the state's] control
over the liquidation proceeding by allowing [the claimant] to
preempt others in the distribution of [the insurance company's]
assets." Barnhardt, 961 F.2d at 532. This not only would violate
the policy of the McCarran-Ferguson Act, but also would undermine
"the comity rationale promoted by the Burford doctrine." Id.
In the instant case, permitting the Texas plaintiffs to
proceed in federal court would undermine the comprehensive
apparatus established by the state of Arizona for the orderly
disposition of claims against insolvent insurance companies.
Appellants seek to leapfrog ahead of all other claimants, who are
bound to bring their claims before the Arizona receiver. Of
course, as the district court recognized, permitting these
plaintiffs to proceed in federal court in Texas would start a race
to the courthouse in any jurisdiction where claims against ABC
might have arisen. The administrative structure established by
Arizona to rehabilitate or liquidate insolvent insurers would
swiftly crumble.
Appellants nonetheless argue that abstention is inappropriate.
They rely primarily on New Orleans Public Service, Inc. v. Council
of New Orleans [NOPSI], 491 U.S. 350, 109 S.Ct. 2506, 105 L.Ed.2d
298 (1989), which in their view "severely curtailed the reach of
Burford abstention." NOPSI explained that under the Burford
doctrine:
Where timely and adequate state-court review is available, a
federal court sitting in equity must decline to interfere with
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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 in
a 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."
NOPSI, 491 U.S. at 361, 109 S.Ct. at 2514 (quoting Colorado River
Water Conservation Dist. v. United States, 424 U.S. 800, 814, 96
S.Ct. 1236, 1245, 47 L.Ed.2d 483 (1976)).
Appellants' argument overlooks the importance of a coherent
state policy to manage insolvent insurance companies. Arizona has
established a system in which a state regulatory investigation of
an insolvent insurer may culminate in the appointment of a receiver
for the rehabilitation of the company, the orderly processing of
claims against it, and, if necessary, its liquidation. Allowing
appellants to proceed in a separate federal court action would defy
common sense, as well as notions of comity and the national policy
embodied in the McCarran-Ferguson Act.
More to the point, appellants overlook the post-NOPSI
decisions of this court in Barnhardt and Martin Ins. Agency, Inc.,
v. Prudential Reinsurance Co., 910 F.2d 249 (5th Cir.1990). These
precedents establish that in this circuit, NOPSI has not abrogated
the rule favoring abstention in deference to state insurance
insolvency or liquidation proceedings. See also Hartford Casualty
Ins. Co. v. Borg-Warner Corp., 913 F.2d 419 (7th Cir.1990); but
see Fragoso v. Lopez, 991 F.2d 878 (1st Cir.1993).
In Martin, the plaintiff, a Louisiana insurance agency, paid
claims that were owed to its clients by Transit Casualty Co., an
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insolvent Missouri insurance company. To recover the money paid
out to the policyholders, Martin filed suit in Louisiana state
court against Transit's reinsurers. The district court granted the
defendant reinsurers' removal motion and dismissed the action. We
affirmed in deference to Transit's ongoing Missouri insolvency
proceedings. As we explained, under Burford,
A federal court should abstain from exercising jurisdiction
where to do so would interfere with a specialized, unified
state court system of adjudication designed to avoid
inconsistent adjudication of claims arising from a
comprehensive, detailed, and complex regulatory scheme in a
subject area involving state law.
Martin, 910 F.2d at 254. We held dismissal appropriate in light of
Missouri's comprehensive regulatory oversight of insolvent
insurance companies. Id. at 255.
Similarly, in Barnhardt, we concluded that the district court
had appropriately stayed the case in deference to ongoing state
proceedings. Barnhardt, an insurance broker, sought to recover
premiums from an insurance company that was the subject of
liquidation proceedings in Louisiana. Relying on NOPSI 's
articulation of the Burford doctrine, we held,
Louisiana's insurance laws provide a comprehensive framework
for the liquidation of insolvent insurance companies and the
resolution of claims against them. Burford-type abstention is
appropriate in an action against an insurance company which is
the subject of a Louisiana liquidation proceeding.
Barnhardt, 961 F.2d at 531 (internal citations omitted). The same
necessarily holds true in this case, since Arizona, like Louisiana,
has adopted the Uniform Insurers Liquidation Act. See generally
ARIZ.REV.STAT. ANN. 20-611 et seq.
In sum, the regulatory regime adopted and enforced by the
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state of Arizona provides for the orderly and fair resolution of
claims against an insolvent insurer. Arizona requires that all
such claims be brought before the receiver, thus avoiding the
likelihood of "inconsistent adjudication" in various jurisdictions.
Cf. Martin, 910 F.2d at 254. The district court did not abuse its
discretion by electing to abstain in these circumstances.
V.
Appellants argue additionally that the district court erred
by extending full faith and credit to the Arizona court's
receivership order. See U.S. CONST. art. IV, § 1; 28 U.S.C. §
1738. This claim rests in part on the premise that "Arizona does
not have an interest in this litigation." The premise is clearly
untenable, since a federal court judgment against ABC inevitably
would destabilize Arizona's efforts to manage ABC's insolvency.
Appellants also assert that their contracts with ABC include
choice of law and forum selection provisions favoring resolution of
the instant case in Texas and under Texas law. They claim that
these clauses militate against extending full faith and credit to
the Arizona receivership court's orders. However, the question
whether to exercise jurisdiction is antecedent to the choice of law
and choice of forum questions. Having found abstention
appropriate, we defer to the Arizona state courts to apply the law
correctly.
Finally, appellants argue that extending full faith and
credit to the Arizona court violates their constitutional right to
due process of law. U.S. CONST. amend. XIV. They argue that
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closing the federal courthouse door in Texas would compel them to
seek relief in Arizona, where they lack the "minimum contacts"
necessary to satisfy due process. Cf. Burger King v. Rudzewicz,
471 U.S. 462, 474, 105 S.Ct. 2174, 2183, 85 L.Ed.2d 528 (1985).
This argument, though creative, is without merit. The minimum
contacts standard protects defendants, not plaintiffs. If a
plaintiff is unwilling to submit to the jurisdiction of the Arizona
Superior Court, he need not bring a claim there. As Justice
Cardozo remarked in a different context, "The timorous may stay at
home." Murphy v. Steeplechase Amusement Co., 250 N.Y. 479, 166
N.E. 173 (1929).
The order of the district court dismissing the action in
deference to the Arizona state court proceedings is AFFIRMED.
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