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).
-3-
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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