Sevigny v. Employers Insurance

United States Court of Appeals
For the First Circuit

No. 04-2411

ROGER A. SEVIGNY, INSURANCE COMMISSIONER,
LIQUIDATOR OF THE HOME INSURANCE COMPANY,

Plaintiff, Appellee,

v.

EMPLOYERS INSURANCE OF WAUSAU,
A MUTUAL COMPANY,

Defendant, Appellant.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF NEW HAMPSHIRE

[Hon. James R. Muirhead, U.S. Magistrate Judge]

Before

Boudin, Chief Judge,

Campbell, Senior Circuit Judge,

and Gertner,* District Judge.

Natasha C. Lisman with whom Andrew R. Levin and Sugarman,
Rogers, Barshak & Cohen, P.C. were on brief for appellant.
Peter C.L. Roth, Senior Assistant Attorney General, with whom
Kelly A. Ayotte, Attorney General, was on brief for appellee.

June 9, 2005

*
Of the District of Massachusetts, sitting by designation.
 BOUDIN, Chief Judge. The case before us presents another

variation on the question when, under the so-called abstention

doctrines, a federal court should defer to state proceedings. The

appellant is Employers Insurance of Wausau (“Wausau”); the appellee

is Roger A. Sevigny, Insurance Commissioner of New Hampshire

(“Commissioner”), acting as liquidator of The Home Insurance

Company ("Home"), now insolvent. We begin with the background

events and then describe the state court proceedings and the

federal action now before us.

Prior to its insolvency, Home was an insurance company,

incorporated and based in New Hampshire, engaged both in providing

insurance to customers and in reinsurance; a reinsurer provides

indemnity to another insurer for a share of payments made under one

or more of the other insurer’s policies. Home provided

reinsurance, as did a related entity called US International

Reinsurance (“USI Re”).

Wausau is a well-known Wisconsin insurer, also engaged in

both insurance and reinsurance. Wausau is Home’s reinsurer under

several reinsurance agreements entered into in the 1980's (the

“outwards agreements”). Under separate agreements, Home and USI Re

became Wausau’s reinsurers (the “inwards agreements”). In the mid-

1990s, quite possibly because Home and USI Re were encountering

financial difficulties, Wausau began to set off--that is, reduce or

“cancel out”--amounts it owed to Home under the outwards agreements

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against amounts it was owed by USI Re under the inwards agreements.

Home is allegedly a 100 percent reinsurer of USI Re’s insurance

obligations and the two companies apparently shared management at

least in part.

Home and USI Re objected to the setoffs and, in 1999,

they arbitrated the matter with Wausau. One issue raised was

whether the debts (owed to Wausau by USI Re) and the credits (owed

to Home by Wausau) being set off by Wausau were “mutual.” Home

argued, inter alia, that there was no mutuality because Wausau was

offsetting the obligations of different entities; Wausau argued

that there was mutuality because Home completely reinsured all of

USI Re’s obligations. The arbitration panels, with minimal

explanation, concluded that Wausau’s setoffs were “proper and

valid.”

On March 5, 2003, the New Hampshire Superior Court of

Merrimack County (on the petition of the then-Commissioner) issued

a rehabilitation order with respect to Home. On June 13, 2003,

after the Commissioner had determined that rehabilitation was

futile, the Superior Court issued an order of liquidation and

appointed the Commissioner as Home’s liquidator under N.H. Rev.

Stat. Ann. §§ 402-C:19, 402-C:21(I) (1998).

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 Among many other things,1 the order enjoined “the setoff

of any debt owing to The Home; provided, however, that

notwithstanding anything in this Order to the contrary, nothing

herein is intended nor shall it be deemed to stay any right of

setoff of mutual debts or mutual credits by reinsurers as provided

in and in accordance with RSA 402-C:34.” The statutory provision

referred to states, with certain exceptions not applicable here, as

follows:

Mutual debts or mutual credits between the
insurer and another person in connection with
any action or proceeding under this chapter
shall be set off and the balance only shall be
allowed or paid . . . .

N.H. Rev. Stat. Ann. § 402-C:34(I) (1998).

The Commissioner, on October 8, 2003, filed suit in the

Superior Court seeking “a judgment” that, under the liquidation

order and section 402-C:34 (quoted immediately above), setoffs only

of mutual debts and credits were permissible; “a judgment that no

mutuality exist[ed]” for the setoffs in this case; and any further

relief deemed proper by the court. On November 20, 2003, Wausau

removed the case to federal district court, invoking jurisdiction

1
The liquidation order contained numerous other provisions.
For example, it directed the Commissioner to secure all the
property and records of Home, ordered that the Commissioner cancel
certain contracts, authorized the Commissioner to engage in certain
transactions, prohibited Home’s officers and employees from
continuing business without the Commissioner’s permission, and
stayed any actions or other attempts to collect against Home.

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based inter alia on diversity of citizenship as between Wausau and

Commissioner.

The Commissioner moved to remand under the Burford and

Colorado River abstention doctrines. The former, derived from

Burford v. Sun Oil Co., 319 U.S. 315 (1943), requires in certain

circumstances a federal court to abstain in favor of state

processes where federal litigation would interfere with a state

administrative scheme and where adequate state judicial review

exists. Colorado River Water Conservation District v. United

States, 424 U.S. 800, 817-19 (1976), represents a more amorphous

abstention doctrine whose contours can be variously described.

These are among various court-made doctrines and statutory

directions that permit, or sometimes require, federal court

abstention.2

Seeking abstention and remand, the Commissioner urged

that New Hampshire has a “comprehensive and uniform” liquidation

scheme that would be disrupted by the intrusion of the federal

court. Wausau opposed, arguing first that the primary issue was

its issue-preclusion defense that the setoffs were proper because

2
The statutory provisions include the Johnson Act, 28 U.S.C.
§ 1342 (2000) (precluding certain injunctions against state public
utility regulation), and the Tax Injunction Act, 28 U.S.C. § 1341
(2000) (precluding injunctions of assessment, levy and collection
of state taxes). Younger v. Harris, 401 U.S. 37 (1971), and
Railroad Commission of Texas v. Pullman Co., 312 U.S. 496 (1941),
are, with Burford and Colorado River, among the principal court-
made abstention doctrines.

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the arbitrators had determined them to be mutual, and more

generally that a federal court decision in this case would not have

the repercussions on Home’s liquidation that the Commissioner

claimed it would.

On September 7, 2004, in an order by the magistrate judge

to whom the case had been submitted, see 28 U.S.C. § 636(c) (2000);

D.N.H. Rule 73.1(b)(2)(B), the district court remanded the case to

the state court, finding that abstention was proper under both the

Burford and Colorado River doctrines. Sevigny v. Employers Ins.

of Wausau, No. Civ. 03-501-JM, 2004 WL 1969871, at *4-*7 (D.N.H.

Sept. 7, 2004) (unpublished opinion). Wausau has now appealed from

the remand order, this being permissible under Quackenbush v.

Allstate Insurance Co., 517 U.S. 706, 715 (1996).

The standard of review as to abstention decisions is

sometimes said to be abuse of discretion. See Dunn v. Cometa, 238

F.3d 38, 43 (1st Cir. 2001). But as we explained in Cotter v.

Mass. Ass’n of Law Enforcement Officers, 219 F.3d 31, 34 (1st Cir.

2000), "abuse of discretion" is sometimes "a misleading phrase"

because "[d]ecisions on abstract issues of law are always reviewed

de novo; and the extent of deference on ‘law application’ issues

tends to vary with the circumstances." In this case nothing

appears to turn on the precise standard of review.

The Burford doctrine is a set of variegated responses

built around a central theme. "The fundamental concern in Burford

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is to prevent federal courts from bypassing a state administrative

scheme and resolving issues of state law and policy that are

committed in the first instance to expert administrative

resolution." Pub. Serv. Co. of N.H. v. Patch, 167 F.3d 15, 24 (1st

Cir. 1998). Burford itself involved a due process clause challenge

in a federal court to a drilling permit issued by the Texas agency

charged with responsibility for such regulation. The Supreme Court

endorsed abstention.

Although the due process challenge raised a federal

issue, the Supreme Court concluded even so that this issue was

closely intertwined with complex issues of state law and policy,

administered through an agency subject to state court review, so

that federal-court interference was likely to cause more disruption

than good. See Burford, 319 U.S. at 323-25, 333-34. The federal

due process issue could, of course, have been resolved in state

court with possible further direct review in the Supreme Court

itself. Id. at 334.

A contrast is provided by New Orleans Public Service,

Inc. v. Council of the City of New Orleans ("NOPSI"), 491 U.S. 350

(1989). There, a city council rate-making order was challenged in

federal court as inconsistent with a federal agency order issued by

the Federal Energy Regulatory Commission ("FERC"). Id. at 356-57.

The Supreme Court rejected Burford abstention, see id. at 361-64,

quite possibly concerned with a threat to the supremacy of the

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federal regulatory scheme if the meaning of the FERC order were

left to state court interpretation on review of the city council

order.

NOPSI is sometimes viewed as cutting back on Burford

abstention, see, e.g., Fragoso v. Lopez, 991 F.2d 878, 882 (1st

Cir. 1993) (“NOPSI cabins the operation of the Burford doctrine.”).

Yet NOPSI also contains a general reformulation of Burford, often

quoted, that can be read expansively or narrowly and is ultimately

ambiguous.3 In any case, there is no Supreme Court precedent

directly in point here: in Quackenbush the Court faced a Burford

issue in an insurance liquidation case but disposed of it on

grounds not relevant here. Quackenbush, 517 U.S. at 730-31.

Circuit precedent is also of only limited help. One of

our own cases, Gonzales v. Media Elements, Inc., 946 F.2d 157, 157

(1st Cir. 1991), found--with minimal analysis--Burford abstention

to be proper in matters involving insurance company liquidation, as

have cases in other circuits.4 More recently, we have issued a

3
The NOPSI passage says that where adequate state court review
is available, federal courts “must decline to interfere with
proceedings or orders of state administrative agencies: (1) when
there are ‘difficult questions of state law bearing on policy
problems of substantial public import . . .’; or (2) where the
‘exercise of federal review . . . 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 (quoting
Colorado River, 424 U.S. at 814).
4
See Feige v. Sechrest, 90 F.3d 846, 847-48 (3d Cir. 1996);
Barnhardt Marine Ins., Inc. v. New Eng. Int’l Sur. of Am., Inc.,
961 F.2d 529, 531-32 (5th Cir. 1992); Hartford Cas. Ins. Co. v.

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decision--Fragoso--that points the other way and purports to limit

our earlier case in light of NOPSI. In Fragoso, the legal issue

embedded in a federal court case involving a liquidating insurer--a

statute of limitations defense--appeared highly conventional and

easily separable from the state reorganization scheme, 991 F.2d at

883-85.5 Still, for various reasons, Fragoso was a somewhat weaker

case for abstention than our own.

So, without the help of clear governing precedent or a

self-executing Burford rule, we turn to our own facts. In doing

so, we remain respectful of Burford's central concern with

protecting state-agency schemes; but we qualify that concern, in

light of NOPSI and Fragoso, with an awareness that some issues

arising in or bearing upon such a proceeding can be litigated in

federal court without threatening state policy--and also that there

is sometimes a special federal interest (e.g., the FERC orders)

that Burford abstention might imperil.

Borg-Warner Corp., 913 F.2d 419, 425-27 (7th Cir. 1990); Lac
D’Amiante de Quebec, Ltee v. Am. Home Assurance Co., 864 F.2d 1033,
1042-49 (3d Cir. 1988); Law Enforcement Ins. Co. v. Corcoran, 807
F.3d 38, 43-44 (2d Cir. 1986).
5
A pre-NOPSI case that also had a narrowing outlook was Bath
Memorial Hospital v. Maine Health Care Finance Commission, 853 F.2d
1007 (1st Cir. 1988). Bath focused on whether the federal court
would have to engage in “highly individualized review of
particular, firm-specific regulatory decisions,” and ultimately
decided that a federal law attack on a state rate-making statute
“as it is written” did not merit Burford abstention because the
case did not involve such review. Id. at 1014.

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 In this case, Burford abstention would be the presumptive

answer had the Commissioner made an administrative decision--say,

claiming an equitable discretion to disallow any setoff injurious

to Home policyholders--and had Wausau then challenged that action

in a federal court diversity suit. But the removed lawsuit here

was one brought by the Commissioner in state court to do only two

things: to construe a state statute governing setoffs (section 402-

C:34) and to apply it (or background state law) to classify

Wausau's attempted setoff as mutual or non-mutual. Wausau in

return has raised a defense of issue preclusion.

Perhaps, in a liquidation scheme like New Hampshire's, a

state court might itself be analogized to an agency for purposes of

Burford.6 But quite unlike Burford, the state-law issues presented

in this case appear conventional, are not discretionary policy or

administrative judgments and could arise in any common-law action.

The Commissioner asserts that Wausau seeks “some form of relief

from the Liquidation Court’s stay order” and that any such relief

(or refusal to grant such relief) would be an exercise of the state

6
This court reserved judgment on the issue in Fragoso, 991
F.2d at 883, but the magistrate judge here cited some precedent for
the view that Burford might in some cases be triggered as readily
by a state court action as by a state agency proceeding. E.g.,
Quackenbush, 517 U.S. at 733 (Kennedy, J., concurring); Feige v.
Sechrest, 90 F.3d 846, 847-48, 851 (3d Cir. 1996) (affirming an
abstention order in deference to state-court liquidation
proceedings); see also Quackenbush, 517 U.S. at 731. Compare NOPSI
(quoted note 3 above) referring specifically to "state
administrative agencies."

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court’s policy-oriented discretion. This is misleading: the

current order tracks the statute and it is the statute that

controls the outcome. Whether or not the state court has some

equitable discretion to forbid setoffs allowed by section 402-C:34,

the Commissioner’s declaratory action asked for no such ruling.

We agree with the magistrate judge that the reading and

application of the state statute may present "difficult questions

of state law." But difficult state law questions alone are not

enough for Burford abstention. See Fragoso, 991 F.2d at 883

(presence of difficult state-law questions, “without more, would

not justify abstention”). Compare R.R. Comm’n of Tex. v. Pullman

Co., 312 U.S. 496, 499-501 (1941) (requiring abstention when state

law is uncertain and a clarification might make resolution of a

federal constitutional issue unnecessary). Burford's concern is

interference with the state regulatory process. NOPSI, 491 U.S. at

361.

No doubt answering the setoff question here will likely

affect the amount of money left for policyholders. But the

financial effects on the liquidation cannot be enough. See

Fragoso, 991 F.2d at 884-85. Otherwise the Commissioner could

invoke Burford in every federal suit between himself as liquidator

and any third party who had a still-unsettled tort or contract

dispute with the now-insolvent insurer, regardless of its actual

disruptive effect upon the liquidation.

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 In sum, the issues presented by the removed case are not

so intertwined with issues of agency authority or state regulatory

policy that their federal-court resolution would imperil a complex

regulatory scheme. Abstention occurs “only in narrowly

circumscribed situations where deference to a state’s

administrative processes for the determination of complex, policy-

laden, state-law issues would serve a significant local interest

and would render federal court review inappropriate.” Fragoso, 991

F.2d at 882. Resolution of the setoff issues by a state, rather

than a federal, court might be justified to assure that the state

statute is properly interpreted; but for this concern certification

is available, see N.H. Sup. Ct. R. 34 (2005), leaving for federal

court resolution other issues not readily certifiable.

Wausau has alleged that even if section 402-C:34 could

otherwise be read and applied as sought by the Commissioner, issue

preclusion establishes that setoff is proper as to the debts

involved here. Further, the company claims that this outcome is

underpinned by the Federal Arbitration Act. This is a complicated

issue, quite apart from any supposed federal interest, which

involves questions of how far arbitration rulings have a collateral

estoppel effect, whose law governs that question, and whether the

issue decided in the arbitration is exactly the same as that posed

under the New Hampshire statute.

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 These are not necessarily federal issues. See Jacobs v.

CBS Broad., Inc., 291 F.3d 1173, 1177 (9th Cir. 2002) (preclusive

effect of arbitration award is a state-law issue); BBS Norwalk One,

Inc. v. Raccolta, Inc., 117 F.3d 674, 677 (2d Cir. 1997) (same).

But in all events, even assuming that the Federal Arbitration Act

has some significance, our disposition would leave any federal

issues in the federal district court. The collateral estoppel

issue is itself distinct from the meaning of the state statute.

If Burford abstention is a work in progress, Colorado

River is scarcely a formal "doctrine" at all. Colorado River

involved two overlapping actions--one, a federal court lawsuit by

the United States against numerous defendants to establish water

rights of its own and of certain Indian tribes; the other, a later-

filed state action involving similar claims to which the United

States was added under a special federal statute allowing such

actions. Colorado River, 424 U.S. at 805-06. Much of the Supreme

Court decision focused on that federal statute. Id. at 806-13.

After resolving that the district court had jurisdiction

to hear the federal case, and that the state court also had

jurisdiction to resolve the United States’ claims, the Supreme

Court considered whether the federal court had properly abstained

in favor of the state proceeding. Although the Court said that no

then-existing abstention doctrine applied, Colorado River, 424 U.S.

at 817, the decision concluded that abstention was nevertheless

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warranted. The main reasons were (1) the special federal statute

encouraging unified resolution of water disputes, (2) the fact that

the federal action had barely begun when the state proceedings

commenced, and (3) the massive impact on state-law water rights

that the federal action would have had in light of the large number

of parties involved. See id. at 819-20.

Colorado River is a case peculiarly tied to its own facts

and to the federal statute there construed. Perhaps its greatest

use is as reminder that abstention doctrines are not a closed-end

collection of exceptions to the "virtually unflagging obligation of

the federal courts to exercise the jurisdiction given them."

Colorado River, 424 U.S. at 817. However, the circumstances of

this case are neither close to those in Colorado River nor do they

suggest any reasons for abstention so powerful as to justify some

new exception to the (often fractured) duty of federal courts to

exercise jurisdiction.

If one were rationally redrafting the law allocating

cases as between federal and state courts, cf. American Law

Institute, Study of the Division of Jurisdiction Between State and

Federal Courts (1969), federal jurisdiction in this case would be

unlikely. So, too, an ad hoc weighing of considerations would

probably favor letting the state court handle the present case,

state law issues being predominant. But while making an ad hoc

judgment of its own in Colorado River, the Supreme Court made clear

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that generally its doctrines govern abstention and that ad hoc

departures are for the extraordinary case.

Accordingly, we vacate the judgment of the district court

and remand with directions to the district court to vacate its own

order remanding the removed case back to state court. Nothing in

this decision precludes the district court from certifying

appropriate state law issues to the New Hampshire courts. Each

side is to bear its own costs on this appeal.

It is so ordered.

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