Riley v. Simmons ( 1995 )

Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit
1-20-1995
Riley v Simmons
Precedential or Non-Precedential:
Docket 94-5055
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"Riley v Simmons" (1995). 1995 Decisions. Paper 17.
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
___________
No. 94-5055
___________
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)
___________
Argued: August 8, 1994
PRESENT: HUTCHINSON and NYGAARD, Circuit Judges,
and LUDWIG, District Judge*
(Filed January 20, 1995)
____________
_______________
* Hon. Edmund V. Ludwig, United States District Judge for the
Eastern District of Pennsylvania, sitting by designation.
Kenneth A. Jacobsen, Esquire
Ira Neil Richards, Esquire (Argued)
Lisa J. Rodriguez, Esquire
Lisa Chanow Dykstra, Esquire
Chimicles, Jacobsen & Tikellis
One Haverford Centre
361 West Lancaster Avenue
Haverford, PA 19041
and
Daniel W. Krasner, Esquire
Peter C. Harrar, Esquire
Wolf, Haldenstein, Adler, Freeman & Herz
270 Madison Avenue
New York, NY 10016
Attorneys for Appellants Thelma Levine and Dr.
Donald I. Schiffman
Lawrence A. Blatte, Esquire
Rosen & Reade
757 Third Avenue
New York, NY 10017
Attorney for Appellant Dr. Donald I. Schiffman
Steven S. Radin, Esquire (Argued)
Joseph L. Buckley, Esquire
Paul F. Doda, Esquire
Sills, Cummis, Zuckerman, Rading, Tischman, Epstein & Gross, P.A.
One Riverfront Plaza
Newark, NJ 07102-5400
Attorneys for Appellees Ted D. Simmons, 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 and Josh Weston
Bruce E. Baldinger, Esquire
45 Route 206 South
P.O. Box 8017
Somerville, NJ 08876
Attorney for Appellee Henry E. Kates
Deborah T. Poritz, Esquire
Attorney General of the State of New Jersey
Sharon M. Hallanan, Esquire
Deputy Attorney General
Hughes Justice Complex, CN 117
Trenton, NJ 08626
and
Robert L. Ritter, Esquire (Argued)
David M. Kohane, Esquire
Cole, Schotz, Meisel, Forman & Leonard, P.A.
25 Main Street
Hackensack, NJ 07601
Attorneys for Intervenor/Appellees, Andrew J.
Karpinski, Acting Commissioner of Insurance of the
State of New Jersey and Rehabilitator of Mutual Benefit
Life Insurance Company in Rehabilitation
____________
OPINION OF THE COURT
____________
HUTCHINSON, Circuit Judge.
Appellants, Thelma Levine ("Levine") and Donald
Schiffman ("Schiffman") (collectively "Plaintiffs"),1 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(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
1
. Plaintiffs are the class representatives for a class
consisting of all persons, except for the former officers and
directors of Mutual Benefit Life Insurance Company ("Mutual
Benefit" or the "Company"), who purchased certain annuities,
which the class alleges were in fact securities subject to the
federal securities laws, from Mutual Benefit.
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.2
2
. Judge Ludwig concurs in the result.
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").3
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
3
. In 1992, while Mutual Benefit's Rehabilitation was ongoing,
the New Jersey Legislature repealed the UILA and enacted the Life
& Health Insurers Rehabilitation & Liquidation Act (the "RLA"),
N.J. Stat. Ann. §§ 17B:32-31 to 17B:32-91 (West Supp. 1994). The
RLA's purpose is "the protection of the interests of insureds,
claimants, creditors and the public generally" by clarifying the
law, equitably apportioning any unavoidable losses, and providing
a comprehensive rehabilitation and liquidation scheme. N.J.
Stat. Ann. § 17B:32-31(b) (West Supp. 1994). The Legislature
expressly made the RLA applicable to pending rehabilitation
proceedings. N.J. Stat. Ann. § 17B:32-37.
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.4 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
4
. The Commissioner's report indicated that Mutual Benefit then
had liabilities of $9.9 billion and $8.8 billion in assets. His
valuation of Mutual Benefit's assets assumed that it would remain
a going concern and would hold its assets for an average of five
to ten years.
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 continuation of the class action suits would
impede the rehabilitation effort.
The state court denied the plaintiffs' motion for class
certification in the state actions without prejudice holding that
the Commissioner had a prior right to pursue these claims and
satisfy them out of the $20 million D & O Policy. The state
court stayed the class actions and ruled that after the
Commissioner's action was concluded, a Rehabilitation Plan
approved, and all appeals exhausted, it would decide whether
plaintiffs had been made whole and whether their actions should
proceed as a class action, if at all. In re Mutual Benefit Life
Policyholders Action Litigation, No. L-91-5318, slip op. at 2
(N.J. Super. Ct. Jan. 5, 1993). The state court permitted
discovery to proceed only to the extent plaintiffs' efforts
"[did] not require any input from the rehabilitation estate and
[did] not interfere with the prior orders of the Court in the
rehabilitation action." Id. at 3. In orders dated January 25,
1993, and June 8, 1993, respectively, the Superior Court of New
Jersey, Appellate Division and the New Jersey Supreme Court
denied the plaintiffs' motions for leave to appeal the lower
court's decision.
D. The Present Case
On August 15, 1991, Plaintiffs5 filed this federal
class action suit on behalf of themselves, and all others
similarly situated, against a number of officers and directors of
Mutual Benefit in the district court. These same officers and
directors are the defendants in the Commissioner's state court
suit, as well as the state court class actions.
The Plaintiffs sought class certification on behalf of
all purchasers of Mutual Benefit annuities between August 14,
1988 and July 15, 1991. Approximately 200,000 individuals fall
into this category. Plaintiffs' complaint alleges that the
various directors and officers joined as defendants: (1)
violated sections 5 and 12(1) of the Securities Act of 1933 (the
"Securities Act"), 15 U.S.C.A. §§ 77e, 77e(1) (West 1981), by
failing to register Mutual Benefit's annuity products with the
SEC as securities; (2) made materially false or misleading
statements in the prospectuses issued in connection with the
annuities in violation of section 12(2) of the Securities Act, 15
U.S.C.A. § 77e(2) (West 1981); (3) were liable as controlling
persons of Mutual Benefit under section 15 of the Securities Act,
5
. The record shows that Levine and Charles Riley initially
filed this suit. Schiffman subsequently filed a suit which the
district court consolidated with the Levine/Riley suit. Riley is
not named as a plaintiff in the amended complaint filed after
consolidation of the two cases.
15 U.S.C.A. § 77o (West 1981); (4) made materially false and
misleading statements about the financial strength of Mutual
Benefit thereby inducing Plaintiffs to purchase the annuities in
violation of section 10(b) of the Securities Exchange Act of 1934
(the "Securities Exchange Act"), 15 U.S.C.A. § 78j(b) (West
1981); and (5) violated New Jersey Statutory and common law,
including the New Jersey Consumer Fraud Act, N.J. Stat. Ann.
§§ 56:8-1 to 56:8-48 (West 1989 & Supp. 1994). The Plaintiffs
alleged that Mutual Benefit compiled a real estate portfolio that
lacked adequate diversification; that Mutual Benefit's overall
portfolio had a substantial concentration in real estate; and
that Mutual Benefit made improper investments.
On August 6, 1993, the officers and directors named as
defendants in this action moved to dismiss the complaint because
the district court did not have subject matter jurisdiction, the
Plaintiffs had failed to state a claim, and they had failed to
assert their fraud claims with the particularity required. The
officers and directors also moved to dismiss the complaint on the
basis of the Burford abstention doctrine or, alternatively, to
stay the action until the Commissioner's action is concluded. On
August 20, 1993, the Commissioner moved to intervene in this
action, and to join the officers' and directors' motion to
dismiss Plaintiff's complaint on abstention grounds or to enter a
stay until the conclusion of the state proceedings.
On December 13, 1993, the district court granted the
Commissioner's motion to intervene6 and dismissed the complaint,
without prejudice on the basis of Burford abstention. See Riley
v. Simmons, 839 F. Supp. 1113 (D.N.J. 1993). This timely appeal
followed.
II. Jurisdiction & Standard of Review
We review the district court's decision to abstain for
abuse of discretion, but the district court's analysis of the law
on abstention is subject to de novo review. Thus:
"A district court has little or no discretion
to abstain in a case that does not meet
traditional abstention requirements. Within
these constraints, determination whether the
exceptional circumstances required for
abstention exist is left to the district
court, and will be set aside on review only
if the district court has abused its
discretion."
Grode v. Mutual Fire, Marine & Inland Ins. Co., 8 F.3d 953,
957-58 (3d Cir. 1993) (quoting United Serv. Auto Ass'n v. Muir,
792 F.2d 356, 361 (3d Cir. 1986), cert. denied, 479 U.S. 1031(1987)).
The district court had subject matter jurisdiction
pursuant to section 22 of the Securities Act, 15 U.S.C.A.
§ 77v(a), and section 27 of the Securities Exchange Act, 15
U.S.C.A. § 78aa. Section 27 grants the federal courts "exclusive
6
. Plaintiffs appeal only the district court's decision to
abstain, not its decision to permit the Commissioner to intervene
in the federal court action.
jurisdiction" over any violation arising under the Securities
Exchange Act. 15 U.S.C.A. § 78aa. In the order which the
Plaintiffs appeal the district court said: "This Court will
dismiss the action without prejudice as Burford abstention is
appropriate." Riley, 839 F. Supp. at 1129. This phrasing raises
a question concerning our appellate jurisdiction. We have a duty
to inquire independently into our own jurisdiction.
Under Borelli v. City of Reading, 532 F.2d 950, 951-52
(3d Cir. 1976) (per curiam), a district court order which
dismisses a complaint without prejudice is generally not
considered a final appealable order. It is final and appealable,
however, if the plaintiff cannot amend the complaint to remove
the ground of dismissal. Borelli, 532 F.2d at 952 (citations
omitted). The district court's decision to abstain under Burford
leaves the Plaintiffs unable to amend the complaint to remove the
reason for the district court's dismissal. Moreover, a decision
to abstain is necessarily "without prejudice" because it always
prevents the court from proceeding to the merits. Thus, Borelli
does not apply to this case.
In Baltimore Bank for Cooperatives v. Farmers Cheese
Cooperative, 583 F.2d 104 (3d Cir. 1978), we considered our
appellate jurisdiction over a district court order staying an
action on the basis of Burford abstention. We noted first that
the proper disposition of a case to which Burford abstention
applies is a "'dismissal of the action, rather than retention of
jurisdiction pending a state determination . . . .'" Id. at 108
(citing Charles Wright, Federal Courts § 52, at 200 (1970)); see
also Erwin Chemerinsky, Federal Jurisdiction § 12.3, at 612
(1989) ("Burford abstention--abstention out of deference to
centralized state administrative proceedings--requires the
federal court to dismiss the case."). We then went on to state:
But the technical failure to dismiss should
not render an ordinarily final disposition of
the case on the basis of abstention
unappealable. Drexler v. Southwest Dubois
School Corp., 504 F.2d 836, 838 (8th Cir.
1974) (en banc). Such an abstention order is
for all intents and purposes a final
disposition of the case within the meaning of
28 U.S.C. § 1291 and is therefore appealable.
Indiana State Employees Ass'n, Inc. v.
Boehning, 511 F.2d 834 (7th Cir. 1975).
Id. at 108-09. We explained our Baltimore Bank holding on
appellate jurisdiction in Richman Brothers Records, Inc. v. U.S.
Sprint Communications Co., 953 F.2d 1431 (3d Cir. 1991). There
we stated:
The teachings of Farmers Cheese are
two-fold: administrative abstention orders,
which completely relinquish federal
jurisdiction by giving way to state
administrative agencies, are final decisions
appealable under section 1291; orders
transferring discrete issues involving
regulatory expertise under the doctrine of
primary jurisdiction, by giving way to a
federal administrative agency, are not final
decisions appealable under section 1291.
Richman Bros. Records, Inc., 953 F.2d at 1442. We opined:
"Generally, when a federal court abstains in deference to a state
court or regulatory agency, the abstention necessarily ends the
federal court's involvement with the suit." Id. at 1443; see
also Chemerinsky, § 12.3, at 612 ("The effect of Burford
abstention is thus not to postpone federal court review but to
prevent it entirely.").
Finally, in Carr v. American Red Cross, 17 F.3d 671,
678 (3d Cir. 1994), we held that, "where [a] dismissal of an
appeal will have the practical effect of denying later appellate
review of a district court's underlying order, the underlying
order must be final, within the meaning of 28 U.S.C. § 1291." In
this case, if we were to determine that we lacked appellate
jurisdiction, we would effectively render the district court's
decision to abstain unreviewable. Our rationale in Baltimore
Bank, Richman Brothers Records, Inc., and Carr demonstrates the
finality of the district court's order. Accordingly we have
appellate jurisdiction over this case under 28 U.S.C.A. § 1291(West 1993).
III. Analysis
Federal courts have an obligation to exercise their
jurisdiction. Abstention, therefore, is the exception rather
than the rule. See Hawaii Housing Auth. v. Midkiff, 467 U.S.
229, 236 (1984); Colorado River Water Conservation Dist. v.
United States, 424 U.S. 800, 817 (1976). Moreover, Burford
abstention has particular relevance to claims arising in the
course of state regulation of insolvent insurance companies. See
Grode, 8 F.3d at 958; Lac D'Amiante Du Quebec, Ltee. v. American
Home Assurance Co., 864 F.2d 1033, 1045 (3d Cir. 1988) ("LAQ");
cf. University of Md. v. Peat Marwick Main & Co., 923 F.2d 265,
270-71 n.6 (3d Cir. 1991) (assuming for purposes of case that
state regulation of insurance companies can provide the relevant
"complex regulatory scheme" or "coherent policy with respect to a
matter of substantial public concern" that are Burford
prerequisites). Recognizing these principles, we examine the
district court's decision to apply Burford abstention to
Plaintiffs' claims, including their federal securities claims,
and to dismiss this action.
The Supreme Court has summarized Burford's underlying
principles as follows:
Where timely and adequate state-court review
is available, a federal court sitting in
equity must decline to interfere with 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."
New Orleans Pub. Serv., Inc. v. Council of New Orleans, 491 U.S.
350, 361 (1989) ("NOPSI") (quoting Colorado River Water
Conservation Dist., 424 U.S. at 814). The principles just
quoted, however, fail to tell the whole story. In NOPSI, the
Supreme Court also teaches us that Burford abstention calls for a
two-step analysis. The first question is whether "timely and
adequate state-court review" is available. Id. Only if a
district court determines that such review is available, should
it turn to the other issues and determine if the case before it
involves difficult questions of state law impacting on the
state's public policy or whether the district court's exercise of
jurisdiction would have a disruptive effect on the state's
efforts to establish a coherent public policy on a matter of
important state concern.
In this case, the district court emphasized the
disruptive effect that the continuation of the federal action
would have on the parallel state rehabilitation proceedings. In
considering whether Plaintiffs had an opportunity for "timely and
adequate state court review" of their federal securities claims,
the district court equated them with the common law fraud claims
the Commissioner was pursuing in his state action. It then
reasoned: "This is not a case where plaintiffs' federal claims
give them an independent or separate remedy" and so concluded
that the state court action provided "'timely and adequate' state
court review. . . ." Riley, 839 F. Supp. at 1127.
Plaintiffs first contend that Burford abstention is
available only in cases invoking equitable remedies and that
their request for class certification and a declaratory judgment
is not primarily addressed to what used to be the equity side of
the court. Plaintiffs also challenge the district court's legal
premise conflating the federal securities claims with the state
common law fraud claims. They argue that the district court
erred in concluding that "timely and adequate state court review"
of their federal securities claims is available and, accordingly,
that the district court's order dismissing their action without
prejudice should be reversed. In the alternative, Plaintiffs
argue that the district court abused its discretion when it
concluded that the continuation of the federal securities action
would exert a disruptive effect on the state rehabilitation
proceedings and interfere with the state's attempt to establish a
coherent policy relating to the regulation of insolvent insurance
companies.
Preliminarily, we consider Plaintiffs' argument that
the district court erred in invoking Burford abstention in a case
in which the primary remedy they seek is money damages. We are
referred again to NOPSI and our own decision in University of
Maryland. In NOPSI, the Supreme Court did indeed state that "a
federal court sitting in equity must decline to interfere with"
state court proceedings where Burford abstention requirements are
met. See NOPSI, 491 U.S. at 361 (emphasis added). In Baltimore
Bank, this Court stated:
Burford, as we have already indicated, was an
equitable action. . . . The instant
litigation to recover a debt is a legal
action. Traditionally, abstention has been
applied only in cases involving equitable
relief. The district court,
however, . . . impermissibly extended
abstention to a common law action.
Baltimore Bank, 583 F.2d at 111 (citation omitted). In
University of Maryland, we said that Baltimore Bank was still
good law in this Circuit. University of Maryland, 923 F.2d at
271.
Plaintiffs therefore argue that Burford abstention is
inappropriate given this Court's statements in University of
Maryland and Baltimore Bank. The officers and directors of
Mutual Benefit, along with the Commissioner, contend that
Plaintiffs are really seeking rescission, an equitable remedy,
and Burford abstention is not precluded even if it remains
available only in cases that stand in equity.7
7
. Although this panel is bound by the earlier holdings of this
Court under Internal Operating Procedure 9.1, see Hammond v.
Commonwealth Mortgage Corp. of Am., 27 F.3d 52, 57 (3d Cir. 1994)
(In re Hammond), the comments in this footnote relating to
Burford abstention in non-equity cases are the opinion of the
opinion writer, not the Court. For a contrary view, see Nygaard,
J., concurring. In my opinion, it is not at all clear whether
the statement in Baltimore Bank restricting Burford abstention to
equity is a holding that survives as the law relating to Burford
abstention has developed or that the Supreme Court's reference in
NOPSI to equity and our reference to it in University of Maryland
and Baltimore Bank are anything but dicta. Furthermore,
substantial confusion continues as to when an action brought
under the federal system's unification of law and equity is
primarily equitable. Considering these uncertainties, I would be
inclined to follow the lead of another panel of this Court faced
with the same issue. It decided:
Decisional authority remains inconclusive as
to whether Burford abstention may be ordered
only in cases of an equitable nature, or
whether, as [we stated in LAQ], the
distinction between legal and equitable
relief is not dispositive in abstention
cases. Hence, we are hesitant to sustain [a]
claim that the district court's abstention
order should be reversed, relying solely on
the ground that [Plaintiffs'] seek[] money
damages, rather than either declaratory or
injunctive relief.
General Glass Indus. Corp. v. Monsour Medical Found., 973 F.2d
197, 202 (3d Cir. 1992) (emphasis added). The Baltimore Bank
issue concerning Burford's restriction to suits in equity was not
initially addressed by the parties, but the Court asked for and
received supplemental briefing on it. This strengthens my
reluctance to decide the case on the ground that Burford
abstention is limited to cases primarily equitable in nature. My
conclusion that Burford abstention does not apply to this case
for other reasons makes it unnecessary for me to delve into
In this case, however, we believe the key to Burford
abstention is whether the Plaintiffs have an opportunity for
"timely and adequate state court review" of their claims. Where
a state court lacks jurisdiction over a plaintiff's claim,
Burford abstention is clearly inappropriate because there can be
no opportunity for "timely and adequate state court review" of a
claim that a court has no power to decide. See University of
Maryland, 923 F.2d at 274 (abstention is inappropriate because it
would deprive plaintiffs "of a forum and of all recourse to have
their claims heard on the merits").
Section 27 of the Securities Exchange Act gives federal
district courts exclusive jurisdiction over claims arising under
that Act. See 15 U.S.C.A. § 78aa.8 In Evans v. Dale, 896 F.2d
975 (5th Cir. 1990), the court of appeals reversed a district
court order, which dismissed on Burford principles security
(..continued)
issues involving arcane distinctions between law and equity and
their continuing relevance to abstention doctrine. I note,
however, that section 12(1) or section 12(2) claims under the
Securities Act may be brought in either law or equity. See
Thomas Lee Hazen, The Law of Securities Regulation §§ 7.2, 7.5,
at 276, 301 (2d ed. 1990); see also infra note 11 (discussing
rescissionary nature of section 12 of the Security Act).
8
. Section 27 provides:
The district courts of the United
States . . . shall have exclusive
jurisdiction of violations of this chapter or
the rules and regulations thereunder, and of
all suits in equity and actions at law
brought to enforce any liability of duty
created by this chapter or the rules and
regulations thereunder.
15 U.S.C.A. § 78aa (emphasis added).
claims arising in the course of a domestic relations dispute.
Evans brought a federal suit, which was ancillary to her divorce
action against her husband Dale, seeking recovery under federal
securities law for misrepresentations Dale had made about
corporate stock during a state court proceeding for division of
property. Evans, 896 F.2d at 976-77. The district court relied
on Burford, heavily emphasizing the reluctance of federal courts
to intervene in issues of state domestic relations law. The
court of appeals held that abstention was inappropriate because
the plaintiff's federal securities claims were subject to
exclusive federal jurisdiction and so could not be considered in
any state court. Id. at 978-79; see also Finkielstain v. Seidel,
857 F.2d 893, 896 (2d Cir. 1988) (holding Burford abstention
inapplicable to action seeking relief for alleged violations of
the Securities Exchange Act within the exclusive jurisdiction of
the federal courts).
The Securities Exchange Act gives federal courts
exclusive jurisdiction over Plaintiffs' Rule 10b-5 claim and
necessarily deprives New Jersey state courts of jurisdiction over
that claim.9 Like the courts in Evans and Finkielstain, we will
9
. Rule 10b-5 implements section 10(b) of the Securities
Exchange Act. It provides:
It shall be unlawful for any person,
directly or indirectly, by the use of any
means or instrumentality of interstate
commerce, or of the mails or of any facility
of any national securities exchange,
(a) To employ any device,
scheme, or artifice to defraud,
reverse the district court's decision to abstain on Burford
principles because there is no possibility of "timely and
adequate state court review" of Plaintiffs' Rule 10b(5) claim,
which Congress has chosen to commit exclusively to the federal
courts.10
The district court concluded that all of Plaintiffs'
claims would receive "timely and adequate state court review"
because Plaintiffs' security claims were essentially the
equivalent of the common law fraud claims being pursued by the
Commissioner in the state court action. The district court
stated: "No further relief can be obtained by asserting the
(..continued)
(b) To make any untrue
statement of a material fact or to omit
to state a material fact necessary in
order to make the statements made, in
light of the circumstances under which
they were made, not misleading, or
(c) To engage in any act,
practice, or course of business which
operates or would operate as a fraud or
deceit upon any person,
in connection with the purchase or sale of any
security.
17 C.F.R. § 240.10b-5 (1993).
10
. Considering the impact such actions may have on procedures
for the rehabilitation or orderly liquidation of insolvent
insurance companies, which Congress has entrusted exclusively to
the states, see 15 U.S.C.A. §§ 1011, 1012 (West 1976), and the
crushing impact that an insurance company's inability to pay the
claims of its insureds and other creditors may have, one could
wonder about the wisdom of this doctrine, but we believe it is
beyond this panel's power to change it.
section 10(b)-5 claim vis-a-vis the Rehabilitator's state court
common law fraud claim." Riley, 839 F. Supp. at 1127.
It is clear, however, that Rule 10b-5 establishes a
cause of action distinct from one for common law fraud. See,
e.g., Marcel Kahan, Games, Lies & Securities Fraud, 67 N.Y.U. L.
Rev. 750, 757, 760-61 (1992). Indeed, the legislative history of
the Securities Exchange Act and its text show that Congress
concluded that the common law remedies of deceit, fraud and
misrepresentation were inadequate and unfair to the average
investor. Consequently it made significant changes in the means
by which liability for those common law torts could be
established. The district court's reliance on the surface
similarity of the Rule 10b-5 remedy to common law remedies for
fraud and misrepresentation highlights the district court's
failure to consider all of Plaintiffs' securities claims,
particularly those based on sections 5 and 12(1) of the
Securities Act. Section 5 of the Securities Act requires a
seller of securities to file a registration statement before
offering a security for sale unless the securities offered come
within statutorily defined exemptions. See 15 U.S.C.A. § 77e.
Section 12(1) provides that a purchaser of a security that is not
registered in accord with section 5 has a civil action for
damages against the seller of the security. Id. § 77l(1).11
11
. Section 12(1) is essentially a rescissionary remedy. It
provides that the person who sells the security is liable to the
purchaser for:
the consideration paid for such security with
interest thereon, less the amount of any
This cause of action and the remedy it affords are clearly
different from common law actions.
In reaching its determination that Plaintiffs had an
opportunity for "timely and adequate state court review" of their
claims, the district court may have also conflated any injury the
putative common law fraud of the officers and directors caused
the purchasers of the variable annuities with any injury that
fraud caused Mutual Benefit and all of its policyholders to
suffer.12 We have held that Burford abstention is inappropriate
where a plaintiff asserts "claims which are broader than, and
different from, the Commissioner's. . . ." General Glass, 973
F.2d at 204. We have also acknowledged that individual
stockholders may have a distinct and independent cause of action
(..continued)
income received thereon, upon the tender of
such security, or for damages if he no longer
owns the security.
15 U.S.C.A. § 77l(1). Similarly, Plaintiffs' remedy under
section 12(2) of the Securities Act is essentially a remedy of
rescission. 15 U.S.C.A. § 77l(2). That section provides a
remedy for material misstatements or omissions made in connection
with the sale or offer for sale of a security.
12
. We use the subjunctive "may have" because any difference
between the injury the purchasers of these annuities suffered and
the injuries the company or its policyholders face depends on
whether the annuities are securities subject to federal
securities law or a type of insurance policy subject to state
insurance law. That question, which involves the merits of the
Plaintiffs' federal and state claims, is yet to be answered. If
it is answered in the negative, there would then appear to be an
adequate opportunity for review of the remaining common law
claims in the courts of New Jersey, in which case the district
court would have to consider whether it should decline to
exercise supplemental jurisdiction pursuant to 28 U.S.C.A.
§ 1367(c)(3) over the Plaintiffs' common law claims.
from that of the corporation or other stockholders premised on
misrepresentations by officers and directors of a corporation.
Hayes v. Gross, 982 F.2d 104, 108 (3d Cir. 1992) ("[A]n
individual stockholder may sue officers and directors based on an
injury distinct from the injury to the corporation and the
indirect injury to stockholders generally."). Plaintiffs'
federal securities claims, like their common law claims, arise
out of the direct losses they suffered as a result of purchases
of annuities by Plaintiffs and other persons similarly situated
to Plaintiffs. Their claim is for losses they directly suffered,
not as stockholders derivatively injured by the directors' or
officers' failure to meet their fiduciary duties to the
corporation. The district court erred when it concluded that
Plaintiffs' federal securities claims were the same as those
being pursued by the Commissioner in the state action.13 We hold
that Plaintiffs' claims, if they turn out to be viable federal
securities claims, are distinct from those the Commissioner now
presses in the pending state action.14 Therefore, if the
13
. Similar analysis might demonstrate that Plaintiffs' fraud
claims under both New Jersey common law and the New Jersey
Consumer Fraud Act are personal to Plaintiffs. Thus, on remand
if the federal claims survive on the merits, the district court
may also have to determine whether Plaintiffs' state law cause of
action for fraud encompasses an injury distinct from any injury
suffered by Mutual Benefit.
14
. The district court's opinion indicates that the Commissioner
was permitted to intervene for the limited purpose of arguing in
favor of Burford abstention. A closer look at its opinion,
however, indicates it also concluded that the Commissioner would
have standing to prosecute the Plaintiffs' federal securities
claims under New Jersey law. See Riley, 839 F. Supp. at 1127.
In reaching this conclusion, the district court relied on N.J.
annuities Plaintiffs bought are securities, they cannot receive
timely and adequate state court review as required by Burford.
We do not rely entirely on any general proposition that
"[a]bstention is also inappropriate . . . [where] a federal issue
is involved which [gives] the district court independent federal
jurisdiction." Grode, 8 F.3d at 960. Taken in its most
expansive sense, that proposition would preclude abstention no
matter how important the state interest or how severe the federal
interference with the state's scheme for resolution of problems
Congress has seen fit to entrust to the states. Nevertheless,
(..continued)
Stat. Ann. § 17B:32-50(a)(15) and In re Integrity Insurance Co.,
573 A.2d 928 (N.J. Super. A.D. 1990). The parties have not
argued the propriety of the district court's intervention
decision on this appeal and therefore we are unwilling to
consider that issue. We note, however, statements in In re
Integrity Insurance Co. indicating that the Commissioner only has
standing to pursue derivative, as opposed to direct, claims of
creditors and policyholders. See In re Integrity Insurance Co.,
573 A.2d at 935 (distinguishing between claims "on behalf of"
creditors and policyholders and claims "belonging to" creditors
and policyholders). As explained, Plaintiffs' claims seem to be
direct claims that are personal in nature at least to the extent
that they seek damages under the federal securities laws.
Section 17B:32-50(a)(15) gives the Commissioner the power to
prosecute actions on "behalf of" policyholders as opposed to
those "belonging to" policyholders. N.J. Stat. Ann.
§ 17B:32-50(a)(15) (West Supp. 1994). The statute expressly
gives the Commissioner standing to pursue such actions when he
acts in liquidation proceedings. It does not mention
rehabilitation proceedings. Compare N.J. Stat. Ann §§ 17B:32-41,
17B:32-42 (providing grounds under which Commissioner may
petition state court to place insurance company in rehabilitation
proceedings) and id. § 17B:32-42 (providing that Commissioner
shall be appointed rehabilitator and outlining responsibilities
of Commissioner in rehabilitation capacity) with id. §§ 17B:32-
45, 17B:32-50 (providing grounds under which Commissioner may
petition state court to place insurance company in liquidation).
the circumstances present in this case, in which the district
court may ultimately decide that the annuities Plaintiffs
purchased are not securities offered in violation of federal
securities law, should lead the district court to proceed
cautiously.
We recognize the Commissioner's argument that
Plaintiffs, by pursuing this action, can put themselves in a
position superior to Mutual Benefit's other policyholders and
claimants who are wholly dependent on the rehabilitation
proceedings. There is some force to the Commissioner's
contention that allowing this action to continue is likely to
interfere with the process of marshalling the assets of Mutual
Benefit and equitably distributing them among all persons who
hold claims against the Company. In this respect, both the
Commissioner and the district court focus on the $20 million fund
the D & O Policy created. They contend that Plaintiffs' action
may remove from Mutual Benefit's estate funds needed for
equitable apportionment among the claims asserted in the state
rehabilitation proceedings. The Commissioner asserts in his
brief: "Any judgment for [Plaintiffs] would wipe out the limits
of the $20 million D & O Policy, and would leave the Commissioner
without insurance coverage for the claims of the other 500,000
policyholders not represented by Plaintiffs' proposed class."
Brief for Intervenor/Appellee at 37. He thus concludes that
Plaintiffs' ability to proceed in a federal forum promotes a race
to the courthouse that can detrimentally affect Mutual Benefit
and its other policyholders.
The officers and directors, as defendants, join this
argument, adding their voices to a chorus raising the inequity
that may result from allowing Plaintiffs to compete in a race for
collection of the D & O Policy's limited fund after the
Commissioner has already spent $1 million of Mutual Benefit's
dollars to ensure that the proceeds of this policy would be
available to its estate. Both the Commissioner and the
defendants also argue that continuation of this action, no matter
what its outcome, will diminish the funds available to Mutual
Benefit and its policyholders because the D & O Policy limits
will be reduced under policy provisions for their use in paying
defendants' legal fees.
We, like the district court, are troubled by diversion
of funds from Mutual Benefit and its policyholders to the cost of
litigation that benefits only one class of persons injured by the
acts of the Company's officers and directors. A remedy for that
problem, however, is beyond the power of this panel under
existing statutory law and what we believe is binding Supreme
Court precedent and circuit procedure. Governing case law seems
to us to make it clear that mere interference with the
Commissioner's ability to marshall the Company's assets cannot
justify Burford abstention over claims exclusively subject to
federal jurisdiction.
Moreover, if the D & O Policy is an essential source of
estate funds, this case appears analogous to Hayes v. Gross,
where this Court rejected a similar argument when it was advanced
by the Resolution Trust Company (the "RTC"). In Hayes, the
plaintiff was a purchaser of the stock of a failed savings
association and sought to recover damages from officers and
directors of the association for violations of the federal
securities laws. Hayes, 982 F.2d at 105. While the savings
association was in receivership RTC asked to have the action
dismissed, arguing that the claim arose out of various officers'
and directors' mismanagement of the savings association, and that
it was therefore a derivative, as opposed to a direct claim. Id.RTC also argued that continuation of the action would impair its
ability to comply with its statutory mandate to maximize the
assets of the savings association. Id. at 109.
We considered whether the continuation of plaintiff's
case affected RTC's prosecution of a mismanagement suit on behalf
of the savings association against the officers and directors.
We stated:
Allowing plaintiff to pursue this claim will
neither prejudice the corporation and its
other stockholders nor permit a double
recovery for the same injury. If [the
savings association] has claims against its
officers and directors arising from their
mismanagement, the RTC is free to pursue
those claims for the ultimate benefit of the
creditors and stockholders of [the savings
association]. Assuming solvency on the part
of the defendants, as we must on this record,
we see no conflict between plaintiff's
interest and those of the creditors and other
stockholders. Assuming insolvency on the
part of the defendants, a conflict between
plaintiff and [the savings association], as
creditors of the defendants, may arise, but
the RTC has advanced no persuasive reason
why, in such circumstances, plaintiff and
[the savings association] should not be
treated as any other creditors competing for
a limited pool of resources.
As far as the potential for double
recovery is concerned, plaintiff has alleged
that the market price of [the savings
association's] stock when he purchased it was
far in excess of what it would have been had
the market been evaluating the failing
institution that defendants knew [it] to be.
Plaintiff will have to prove this allegation.
When he attempts to do so, it may be that he
will attempt to recover compensation to which
the corporation is justly entitled. If so,
the district court will be required to
evaluate the prospect of double recovery in
the specific fact context presented by
plaintiff's case on damages. It will suffice
for present purposes to conclude, as we do,
that double recovery is not inherent in
plaintiff's theory of the case and,
accordingly, that recovery without
duplication is possible.
Id. at 108-109 (footnotes omitted) (emphasis added).
Specifically, we also noted, that "[i]f both plaintiff and the
RTC prove[d] entitled to judgment, there [would] be no inequity
in requiring defendants to satisfy both judgments." Id. at 109.
The assumption of ultimate solvency may be quite
optimistic, but in this case, as in Hayes, we are constrained to
act within the record and this record does not show that the
D & O Policy is essential to the rehabilitation of Mutual
Benefit. We see nothing on the face of this record that supports
the Commissioner's conclusion that the D & O Policy is the only
asset available for satisfaction of a judgment against the
various officers and directors who are defendants. Similarly, in
University of Maryland, we rejected this argument when it was
advanced in support of Burford abstention. There, concluding
that the policyholders' claims were direct, as opposed to
derivative, we held that Burford abstention was inappropriate.
Hayes, and University of Maryland, compel this panel to
hold that it is inappropriate to dismiss a plaintiff's action
solely because collection of a judgment, if obtained, might
reduce the assets of an insolvent insurance company's estate.15
The Commissioner's argument may support a conclusion that
continuation of the federal action is likely to disrupt "'state
efforts to establish a coherent policy with respect to a matter
of substantial public concern,'" but as we have stated throughout
this opinion this is insufficient to justify Burford abstention
when there is no opportunity for "timely and adequate state court
15
. This principle was acknowledged by The United States Court
of Appeals for the Fifth Circuit in rejecting the application of
Burford abstention to plaintiff's claims in Evans v. Dale:
By deciding the federal securities fraud
issues asserted here, the district court will
not usurp any part of Texas domestic
relations law. It is true that the outcome
of the exclusively federal issue may affect
the relative value of property distributions
which will be made by the Texas court and may
even require a redistribution of that
property. However, the decision regarding
distribution or redistribution under Texas
domestic relations law will remain entirely
within the authority of the Texas court. If
the district court orders disgorgement of the
profits made by Dale in stock transactions
subsequent to the divorce or takes other
remedial action allowed by the federal
securities laws, it will do so under its
exclusive jurisdiction vested pursuant to
those laws.
Evans, 896 F.2d at 979.
review" of Plaintiffs' claims. NOPSI, 491 U.S. at 261 (quoting
Colorado River Water Conservation Dist., 424 U.S. at 814).
Plaintiffs' claims in this case, like those in Hayes
and University of Maryland, appear to be direct claims for their
own injuries. Their federal security claims are substantially
different than, and distinct from, the claims advanced by the
Commissioner in the state action. To the extent that Plaintiffs
have asserted valid securities claims,16 it seems clear to us
that those claims are direct, rather than derivative. As we have
already noted, however, the problem created by the lack of an
opportunity for state court review would be eliminated if
Plaintiffs' annuities are not "securities" under federal law.
Moreover, if Plaintiffs do recover under the federal securities
laws, they should no longer be entitled to share in the funds of
the Company, including any funds realized from the Commissioner's
action against the directors and officers in state court.
Therefore, as we noted in Hayes, it would be appropriate for the
district court, in determining damages, to adjust the Plaintiffs'
remedy in this action to account for any potential for double
recovery in the state rehabilitation proceeding. See Hayes, 982
F.2d at 109.
IV.
16
. As we have previously noted, the district court did not
reach the merits of Plaintiffs' securities claims, nor do we.
See supra notes 12 and 13.
In conclusion, we hold that Burford abstention is
precluded when a state court has no jurisdiction over a
plaintiff's direct as opposed to derivative claims. When a
plaintiff presses a direct claim within the jurisdiction of a
federal court, there is no basis for Burford abstention, if the
plaintiff cannot receive timely or adequate state court review of
the claim. Here, it is clear that Plaintiffs' 10b-5 claim falls
exclusively within the province of the federal courts. Moreover,
as to their claims under sections 5, 12(1), 12(2), and 15 of the
Securities Act, it is equally apparent that there is no
opportunity for timely state court review, as these claims are
personal to the Plaintiffs. Because the district court erred
when it conflated Plaintiffs' federal securities claims with the
common law fraud claims of the Commissioner, and in concluding
that Plaintiffs had an opportunity for timely and adequate state
court review of their claims, we will reverse the district
court's order dismissing Plaintiffs' claims under the Burford
abstention doctrine, and remand for further proceedings
consistent with this opinion.
Riley v. Simmons, No. 94-5055
NYGAARD, Circuit Judge, concurring.
I agree with the opinion of the court that the district
court erred when it applied Burford abstention. I also believe,
alternatively, that Burford abstention is simply not available
when legal, rather than equitable or declaratory, relief is
sought.
In Baltimore Bank for Coops. v. Farmers Cheese Coop.,
583 F.2d 104, 111 (3d Cir. 1978), a bank filed a diversity action
seeking monetary recovery for milk it had sold and delivered to
the defendant. The district court abstained under Burford, but
we reversed, holding that Burford abstention is not available in
legal, common law actions. We stated:
Burford . . . was an equitable action to
restrain the Texas Railroad Commission. The
instant litigation to recover a debt is a
legal action. Traditionally, abstention has
been applied only in cases involving
equitable relief. The district court,
however, . . . impermissibly extended
abstention to a common law action.
Id.A decade later, we broadened the scope of Burford
abstention in Lac D'Amiante du Quebec, Ltee. v. American Home
Assur. Co., 864 F.2d 1033 (3d Cir. 1988). In that case, an
asbestos manufacturer sued its insurer for a declaratory judgment
rather than money damages. The insurer, as here, was in state
rehabilitation proceedings. We noted that Burford relied on the
traditional discretion of a federal equity court to enforce or
protect legal rights, stating the issue as "whether Burford
abstention is appropriate in a case . . . where the court is not
being asked to provide equitable relief." Id. at 1044. We held
that abstention was available in the limited context of
declaratory relief, opining:
[T]he central concern animating the Court's
decision to abstain in Burford -- preventing
the state regulatory scheme from needless
disruption -- simply does not depend on
whether the relief sought by the plaintiff is
properly characterized as legal or equitable.
If the relief sought is legal and the
disruption is of the extent and character
suggesting that Burford abstention is
appropriate, a refusal to abstain simply
because the federal court is not sitting in
equity makes no sense.
Id. Notwithstanding this broad dictum, however, we concluded
"that Burford abstention is appropriate in cases seeking
declaratory relief, even though such relief does not fall within
the traditional boundaries of equity jurisdiction." Id. at 1045.
In a footnote, we specifically noted that, because declaratory
relief was created by a 1934 act of Congress, it was not a common
law action and our holding did not conflict with Baltimore Bank.
Id. at 1045 n.14.
The next year, the Supreme Court decided New Orleans
Pub. Serv., Inc. v. Council of New Orleans ("NOPSI"), 491 U.S.
350, 109 S. Ct. 2506 (1989). Although the Court did not decide
the issue of whether Burford abstention is available in non-
equitable actions, it did state in dictum that "[w]here timely
and adequate state-court review is available, a federal court
sitting in equity must decline to interfere with the proceedings
or orders of state administrative agencies . . . ." Id. at 361,
109 S. Ct. at 2514 (emphasis added).17 Thus, while NOPSI is
certainly not dispositive, it lends no support whatsoever to the
proposition that Burford abstention should be available in cases
where the relief sought is money damages.
This court reviewed the issue of Burford abstention in
legal actions in University of Md. v. Peat Marwick Main & Co.,
923 F.2d 265, 271-72 (3d Cir. 1991). There, a federal class
action was filed against the independent auditors of a failed
insurer in rehabilitation proceedings. The suit alleged that the
auditors had made false and misleading statements about the
insurer's financial condition, as a result plaintiffs bought
insurance policies that later turned out to be no good. We
relied on both NOPSI and Baltimore Bank and reiterated our
earlier holding that Burford abstention is simply not available
in a case where the plaintiff seeks only monetary damages. Id.
at 271-72. We stated:
[T]he Supreme Court [in NOPSI] stated,
admittedly in dictum, that Burford abstention
applies to a federal court sitting in equity.
Without reading too much into this dictum, we
believe . . . that NOPSI generally cautions
lower federal courts not to extend Burford
abstention beyond proper bounds. Here,
unlike Burford and the other Supreme Court
17
. Based on the above dictum, the Court of Appeals for the
First Circuit has held that post-NOPSI Burford abstention is very
narrow and is not available in legal actions. See Fragoso v.
Lopez, 991 F.2d 878, 882 (1st Cir. 1993).
cases involving Burford doctrine, the action
was at law, not in equity, and sought
monetary damages.
Id. at 271 (quotation marks and internal citations omitted). The
opinion then dealt with the insurance commissioner's argument
that Lac D'Amiante had eliminated the limitation of Burford
abstention to equitable actions:
[Lac D'Amiante], however, predated NOPSI, and
the Supreme Court in NOPSI has given no
indication that the distinction between legal
and equitable relief has been diluted.
Furthermore, all that [Lac D'Amiante] holds
is that Burford may be extended to cases
seeking declaratory relief -- which is in
many ways similar to injunctive relief -- not
that it may be extended to cases for monetary
damages. . . . [Lac D'Amiante] did not alter
the principle established in Baltimore Bank.8
8Indeed, under our Internal Operating
Procedures, the [Lac D'Amiante] panel could
not have overruled the holding of a prior
published opinion in this Circuit.
Id. at 272 & n.8 (citation omitted).
Thus, as of 1991, the law in this circuit was clear:
Burford abstention was only available where equitable or
declaratory relief was sought. Abstention in legal actions was
barred by Baltimore Bank and University of Maryland.
In General Glass Indus. Corp. v. Monsour Medical
Foundation, 973 F.2d 197 (3d Cir. 1992), however, a panel of this
court reached the opposite conclusion. Relying on what it
perceived to be inconclusive authority, the General Glass panel
refused to rule out abstention merely because the relief sought
consisted of monetary damages. Id. at 202.
I think General Glass was incorrectly decided,
containing two analytical errors. First, the panel relied on the
dictum in Lac D'Amiante which indicated that "the distinction
between legal and equitable relief is not dispositive in
abstention cases," id., but did not cite or discuss the clear
holding of Baltimore Bank that forbids abstention when money
damages are sought.18 Second, it relied on Tafflin v. Levitt,
493 U.S. 455, 110 S. Ct. 792 (1990), in which the Supreme Court
affirmed a district court judgment applying Burford abstention in
a RICO action seeking money damages. Notably, however, the
Court's grant of certiorari in that case was limited solely to
whether state courts have concurrent jurisdiction over RICO
claims. Id. at 458, 110 S. Ct. at 794. Tafflin therefore had no
precedential value on the issue before the General Glass panel.
Thus, because the binding decisional law never was inconclusive
in the first place, the General Glass panel's reluctance to apply
the clear holdings of Baltimore Bank and University of Maryland
was not justified.
In any event,
Internal Operating Procedure 9.1 sets forth
our judicial tradition that no panel of this
court may overrule the published holding of a
18
. The opinion did mention University of Maryland, but only in
a "but see" citation, without any analysis, in which it opined
that the University of Maryland court only "intimat[ed]" that
Burford abstention is unavailable in legal actions. Id.previous panel. Only the in banc court may
do that. To the extent that the decision of
a later panel conflicts with existing circuit
precedent, we are bound by the earlier, not
the later, decision.
United States v. Monaco, 23 F.3d 793, 803 (3d Cir. 1994).
Accordingly, because General Glass flatly conflicts with both
Baltimore Bank and University of Maryland, neither of which have
been overruled, I am respectfully forced to conclude that
General Glass was wrongly decided and never was the law of this
circuit.
Applying Baltimore Bank and University of Maryland to
this case, it is clear that Burford abstention is not available.
Although the complaint does plead rescission, admittedly an
equitable remedy, the plaintiffs have not sued the only party
capable of giving rescission: Mutual Benefit itself. Instead,
they have sued only the individual officers and directors, who,
if found liable, can respond only in damages. I take no delight
in this conclusion. Although the abstention doctrines have their
root in equity cases, I am aware of no reason why abstention
should not equally be available where monetary damages are
sought. See Lac D'Amiante, 864 F.2d at 1044. As one leading
treatise puts the matter:
Considerations of federalism are at the heart
of abstention. These considerations are too
important to be made dependent on ancient
distinctions about the powers of the several
courts at Westminster Hall, and the ability
of a federal court to defer to a state in a
proper case ought not depend on whether the
case is thought of as "legal" or "equitable."
17A Charles A. Wright, et al., Federal Practice and Procedure §
4241, at 17-18 (1988).
Delightful or not, however, our circuit's law is clear,
and until and unless the in banc court or the Supreme Court
overrules Baltimore Bank, we remain bound by it.