Feige v. Sechrest , 90 F.3d 846 ( 1996 )

Opinions of the United
1996 Decisions States Court of Appeals
for the Third Circuit
7-29-1996
Feige v. Sechrest
Precedential or Non-Precedential:
Docket 95-1236
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Recommended Citation
"Feige v. Sechrest" (1996). 1996 Decisions. Paper 128.
http://digitalcommons.law.villanova.edu/thirdcircuit_1996/128
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 95-1236
ROBERT FEIGE; PATRICIA FEIGE; DP REALTY TRUST, INC.;
DP REALTY TRUST; FICREST RETIREMENT CORPORATION;
FICREST RETIREMENT NOMINEE TRUST; COVEST, LTD.
v.
STEVEN SECHREST; EMIL MOLIN; FREDERICK RICHARDSON;
CHARLES LUNDEN; HARRY STOKES; THE FRENCH COMPANY, INC.;
LINDA KAISER, Insurance Commissioner of the Commonwealth of
Pennsylvania
Robert F. Feige, Patricia Feige, DP Realty Trust, Inc.,
DP Realty Trust, FiCrest Retirement Corporation, Ficrest
Retirement Nominee Trust and CoVest, Ltd.,
Appellants
(Caption amended as per the Clerk's 8/28/95 Order)
ON APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
(D.C. Civ. No. 94-06738)
Argued October 31, 1995
Before: NYGAARD, ALITO and SAROKIN, Circuit Judges.
(Opinion Filed: July 29, 1996 )
Joshua Slavitt (Argued)
Alan M. Rosen
Klehr, Harrison, Harvey,
Branzburg & Ellers
1401 Walnut Street
Philadelphia, PA 19102
John H. Perten
Bowditch & Dewey
161 Worcester Road
6th Floor
Framingham, MA 01701
Attorneys for Appellants
Frederick Richardson,
Pro se
Steven Kapustin
Heller, Kapustin,
Gershman & Vogel
486 Norristown Road
Suite 230
Blue Bell, PA 19422
Attorney for Appellee
Charles Lunden
William G. Frey
Jerome J. Shestack
Bernard Chanin (Argued)
Wolf, Block, Schorr
& Solis-Cohen
S.E. Corner,
15th & Chestnut Streets
Packard Building, 12th Floor
Philadelphia, PA 19102
Attorneys for Appellees
Harry Stokes,
The French Co., Inc.,
Cynthia M. Maleski,
Insurance Commissioner
of the Commonwealth
of Pennsylvania
OPINION OF THE COURT
NYGAARD, Circuit Judge.
The issue before us is whether, in the face of a statutory
insurer liquidation proceeding in the Pennsylvania Commonwealth
Court, the district court properly stayed this action under the
Burford abstention doctrine. We conclude that abstaining and
retaining jurisdiction was proper, and hence we will affirm.
I.
The allegations of this case form a tangled web of intrigue,
fraud and self-dealing. It suffices to say that Feige and
Sechrest purchased Corporate Life Insurance Company and allegedly
converted $11 million of its mortgage loan portfolio. Corporate
Life sued them. Sechrest settled his case and was released from
liability. Sechrest and Corporate Life then joined forces and
sued Feige, seeking, inter alia, to have certain Feige-Sechrest
entities dissolved.
Feige then filed this suit, alleging that Corporate Life
fraudulently misrepresented its assets to the Pennsylvania
Insurance Department and falsely accused Feige and the Feige-
Sechrest entities of converting Corporate Life's mortgage
portfolio. Shortly after the complaint was filed, however, the
Pennsylvania Commonwealth Court directed the liquidation of
Corporate Life and stayed all actions against it. Cynthia
Maleski, the Statutory Liquidator for Corporate Life, moved to
stay this action under the Burford abstention doctrine. The
district court granted her motion, Feige v. Sechrest, 896 F.
Supp. 403 (E.D. Pa. 1995), and this appeal followed. We have
appellate jurisdiction under 28 U.S.C. 1291, even though the
district court departed from the traditional application of
Burford abstention by staying the action rather than dismissing
the complaint. See Moses H. Cone Mem. Hosp. v. Mercury
Construction Corp., 460 U.S. 1, 8-10 & nn. 8, 11, 103 S. Ct. 927,
933-34 & nn.8, 11 (1983); Richman Brothers Records, Inc. v. U.S.
Sprint Communications Co., 953 F.2d 1431, 1442 (3d Cir. 1991),
cert. denied, 505 U.S. 1230, 112 S. Ct. 3056 (1992); Hovsons,
Inc. v. Secretary of the Interior, 711 F.2d 1208, 1211 (3d Cir.
1983); Baltimore Bank for Cooperatives v. Farmers Cheese
Cooperative, 583 F.2d 104, 108-09 (3d Cir. 1978).
II.
We recently addressed the standard governing Burfordabstention:
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."
Riley v. Simmons, 45 F.3d 764, 771 (3d Cir. 1995) (quoting New
Orleans Pub. Serv., Inc. v. Council of New Orleans ("NOPSI"), 109
S. Ct. 2506, 2514-15 (1989)). At this point in our
jurisprudence, there can be little doubt that parallel federal
and state proceedings would disrupt Pennsylvania's legislative
framework for the liquidation of insolvent insurers. See, e.g.,
General Glass v. Monsour Medical Found., 973 F.2d 197, 201 (3d
Cir. 1992); Lac D'Amiante du Quebec, Ltee. v. American Home
Assur. Co., 864 F.2d 1033, 1045 (3d Cir. 1988). We therefore
proceed to address the two substantial issues raised on this
appeal: first, whether adequate state court review is available;
and second, whether Burford abstention may be applied when, as
here, the complaint contains claims for money damages.
A.
Appellants argue that adequate state court review is not
available because the Commonwealth Court has no jurisdiction over
the claims they assert in this action. The district court
disagreed, opining:
Plaintiffs' claims against non-Corporate Life
defendants, to the extent they do not arise under the
Insurance Act, are not within the original jurisdiction
of the Commonwealth Court. Nevertheless, those
involving the French Company and the Hearthstone bonds
materially affect Corporate Life and are therefore a
part of the Commonwealth Court action. All of the
claims against the principals of Corporate Life are
derivative. The remaining ones are against Sechrest
for conversion of plaintiffs' assets and illegal
litigation tactics by reason of his allegedly joining
forces with Corporate Life. These claims should be
decided as part of the original dispute between
Corporate Life and Feige-Sechrest or deferred until
that dispute is resolved.
Feige, 896 F. Supp. at 405.
By statute, the Commonwealth Court has jurisdiction over all
claims arising under the Insurance Act of 1921. 42 Pa. C.S.
761. Because any claims against Corporate Life (since replaced
by the Statutory Liquidator) arise under the Act, all or parts of
counts III-VIII and X-XIII are subject to timely and adequate
state court review. Indeed, there is currently an ongoing
proceeding in that court regarding the liquidation of Corporate
Life.
Many of appellants' remaining counts (or portions of counts)
are derivative actions against the directors of Corporate Life.
Because derivative claims are asserted on behalf of the
corporation, and that corporation is undergoing statutory
liquidation, they are bound up intimately with the liquidation
proceeding and likewise arise under the Act.
That leaves the claims against Sechrest and The French Co.,
Inc. for breach of fiduciary duty (counts I & II), rescission
(count V), civil conspiracy (count VII), abuse of process (count
VIII), conversion (count IX), tortious interference (count XI)
and indemnity (count XIII). Although these claims are certainly
related to the statutory liquidation of Corporate Life,
appellants argue that they are no more than garden-variety torts
which do not arise under the Insurance Act and are not
inextricably bound up with the liquidation. Under appellants'
theory, these claims belong not in the Commonwealth Court, but in
the Court of Common Pleas, a court where there is currently no
pending proceeding. Thus, they argue, the liquidation
proceedings will not provide an adequate forum in which to
resolve their claims. This argument, however, is belied by the
fact that appellants have asserted a cross-claim against appellee
Sechrest in the Commonwealth Court action, Maleski v. DP Realty
Trust, raising most of the same counts listed above.
It is clear that the Commonwealth Court has jurisdiction
over counterclaims. See Commonwealth v. Frank Briscoe Co., 466
A.2d 1336, 1340 (Pa. 1983). Based on that case, appellees assert
that there is jurisdiction over cross-claims as well. A case
they omit from their brief, however, appears on first inspection
to require a contrary result. In Commonwealth v. Joseph Bucheit
& Sons, 483 A.2d 848 (Pa. 1984), the Commonwealth brought an
action against a contractor in Commonwealth Court. Defendant
counterclaimed against the state and sought to join a steel
supplier as an additional defendant. Another defendant then
filed a cross-claim against the first defendant. The supreme
court held that, while the counterclaim was within the
jurisdiction of the Commonwealth Court, the other claims were
not, limiting the reasoning of Frank Briscoe to the context of
counterclaims. Accordingly, if Joseph Bucheit is controlling
authority, the Commonwealth Court has no jurisdiction over
appellants' cross-claims.
We do not believe that Joseph Bucheit stands for the broad
proposition that the Commonwealth Court has no jurisdiction over
cross-claims. That case was decided under 42 Pa. C.S.
761(a)(2) (jurisdiction of actions brought by the Commonwealth),
not 761(a)(3) (actions arising under the Insurance Act). In
fact, the Joseph Bucheit court stated specifically that the
involvement of the Commonwealth as a party was key to its
decision:
The spectre of the Commonwealth awaiting final judgment
in a case where its own right to recovery has been
established, while numerous general contractor and
subcontractor defendants and additional defendants seek
to shift ultimate responsibility among themselves, is
sufficient to counsel the conclusion that the holding
in Briscoe must not be extended beyond its facts.
483 A.2d at 851.
Jurisdiction in this action, however, is based on the
Liquidator's case arising under the Insurance Act, as the
Commonwealth Court has already held. See Maleski v. DP Realty
Trust, 653 A.2d 54, 65 (Pa. Commw. Ct. 1994). As that court
stated:
Section 221.26 of the Insurance Act provides that
the "liquidator may [. . .] institute an action or
proceeding on behalf of the estate of the insurer upon
any cause of action" for which the statute of
limitations have [sic] not expired. Additionally,
Section 221.28 of the Insurance Act permits the
liquidator to avoid fraudulent transfers made by the
insurer [. . .], and Section 221.23 of the Insurance
Act authorizes the liquidator to "collect all debts and
money due and claims belonging to the insurer. Because
this Court is expressly vested with "the original
jurisdiction of all civil actions or proceedings
arising under Article V of the Insurance Act, and since
the Complaint, filed by the Statutory Liquidator of
Corporate Life, alleges causes of action on behalf of
Corporate Life and also seeks to recover fraudulently
obtained assets, it arises under Article V of the
Insurance Act. Accordingly, this Court has original
jurisdiction over the claims.
Id.Here, of course, it is not the Statutory Liquidator who is
bringing the action, but Feige. Nevertheless, a major part of
what Feige is seeking through this litigation is to rescind the
asset transfer made by Sechrest to the estate of Corporate Life.
If Feige prevails, the effect of the judgment will be to remove
those assets from the estate and affect directly and adversely
what the Liquidator is attempting to achieve through her
proceedings: the protection of the policyholders. Thus, even
though this case appears on the surface to involve "garden-
variety" torts committed by private parties, we conclude that it,
too, arises under the Insurance Act. Accordingly, the
Commonwealth Court has jurisdiction over the claims, which leads
inexorably to the conclusion that there is adequate state court
review for purposes of Burford abstention.
B.
Before we conclude that Burford abstention was applied
correctly, however, we must also confront the fact that the vast
majority of the claims asserted by appellants are legal in nature
and seek only money damages. Of thirteen counts pleaded in their
complaint, only counts V (rescission), VI (declaratory judgment),
and counts IX and X (seeking injunctive relief for defendants'
alleged conversion) are not solely legal in nature. The district
court believed that "[t]he essence of the action is that the
combination formed by Corporate Life and Sechrest against Feige
should be set aside and penalized. These are matters that
obviously sound in equity." Feige, 896 F. Supp. at 406. We will
affirm, but on a different ground.
1.
Whether Burford abstention may be applied in cases where
other than equitable relief is sought has been the source of some
confusion in our caselaw. In Baltimore Bank, we held that
Burford was not available in an action at law. 583 F.2d 111-12.
A decade later, in Lac D'Amiante du Quebec, Ltee. v. American
Home Assur. Co., 864 F.2d 1033 (3d Cir. 1988), we permitted
Burford abstention in a case where declaratory relief was sought,
opining in dictum that "a refusal to abstain simply because the
federal court is not sitting in equity makes no sense." Id. at
1044. Then, a few years later, we reaffirmed the holding of
Baltimore Bank in University of Maryland v. Peat Marwick Main &
Co., 923 F.2d 265 (3d Cir. 1991), denying abstention in a case
where legal relief was sought. Id. at 271-72.
A year later, however, another panel of this court reached
the opposite result in another insurance abstention case. In
General Glass Indus. Corp. v. Monsour Med. Foundation, 973 F.2d
197 (3d Cir. 1992), the panel read the Lac D'Amiante dictum
together with Tafflin v. Levitt, 493 U.S. 455, 110 S. Ct. 792(1990), in which the Supreme Court appeared to uphold sub
silentio the application of Burford to an action at law.
Concluding that the decisional authority was inconclusive, it
interpreted University of Maryland as only "intimating" that
Burford abstention was not available in legal actions and
partially affirmed the district court's application of
abstention. Id. at 202.
More recently, in Riley v. Simmons, we held that Burfordabstention
was improper, but the panel was divided as to the
rationale for the decision. The opinion writer, speaking only
for himself, believed that abstention was not available because
there was no adequate opportunity for state court review of
plaintiffs' securities claims, which were subject to exclusive
federal jurisdiction. See 45 F.3d at 777. The concurrence, on
the other hand, expressed the view that Burford cannot be applied
to actions at law, rejecting General Glass and relying on
Baltimore Bank and University of Maryland. Id. at 777-79
(Nygaard, J., concurring). A district judge, sitting by
designation, concurred in the result without explanation. Id. at
766 n.2
2.
After this case was briefed and argued before us, the
Supreme Court handed down an opinion that settles the issue. In
Quackenbush v. Allstate Ins. Co., 116 S. Ct. 1712 (1996), the
California Insurance Commissioner sued Allstate in state court
seeking damages in contract and in tort for Allstate's alleged
breach of its reinsurance agreements. Allstate removed the case
to federal district court and sought an order compelling
arbitration. The Commissioner then moved for a remand to state
court under Burford. The district court granted the motion and
dismissed the complaint. See id. at 1717. On appeal, the Ninth
Circuit reversed, holding that Burford abstention cannot be
granted in any form when the relief sought is solely legal in
nature. Garamendi v. Allstate Ins. Co., 47 F.3d 350, 354-56 (9th
Cir. 1995).
The Supreme Court affirmed. It noted that "the power to
dismiss under the Burford doctrine, as with other abstention
doctrines, . . . derives from the discretion historically enjoyed
by courts of equity." 116 S. Ct. at 1726. Because such remedies
have historically been committed to the chancellor's discretion,
in cases where the relief being sought is equitable in
nature or otherwise discretionary, federal courts not
only have the power to stay the action based on
abstention principles, but can also, in otherwise
appropriate circumstances, decline to exercise
jurisdiction altogether by either dismissing the suit
or remanding it to state court. By contrast, while we
have held that federal courts may stay actions for
damages based on abstention principles, we have not
held that those principles support the outright
dismissal or remand of damages actions.
Id. at 1723. The granting of legal remedies provided by
applicable law and proven as a factual matter has not
traditionally been subject to the court's discretion.
Accordingly, given the "virtually unflagging obligation to
exercise the jurisdiction given them" by Congress, see Colorado
River Water Conservation Dist. v. United States, 424 U.S. 800,
821, 96 S.Ct. 1236, 1248 (1976), a district court may not abstain
under Burford and dismiss the complaint when the remedy sought is
legal rather than discretionary. Quackenbush, 116 S. Ct. at
1727. To the extent, then, that General Glass held that Burfordabstention
may be applied to dismiss a complaint in an action at
law, it has been overruled by Quackenbush.
In the present case, however, while the district court
abstained under Burford, it stayed the action rather than dismiss
the complaint. In Quackenbush, the Supreme Court indicated in
dictum that such a course is proper:
Unlike the outright dismissal or remand of a federal
suit, . . . an order merely staying the action "does
not constitute abnegation of judicial duty. On the
contrary, it is a wise and productive discharge of it.
There is only postponement of decision for its best
fruition."
Id. at 1723 (quoting Louisiana Power & Light Co. v. Thibodaux,
360 U.S. 25, 29, 79 S.Ct. 1070, 1073 (1959)). Thus, the Court
continued:
In those cases in which we have applied traditional
abstention principles to damages actions, we have only
permitted a federal court to withhold action until the
state proceedings have concluded; that is, we have
permitted federal courts applying abstention principles
in damages actions to enter a stay, but we have not
permitted them to dismiss the action altogether[.]
The per se rule described by the Ninth Circuit
is, however, more rigid than our precedents require.
We have not strictly limited abstention to equitable
cases, but rather have extended the doctrine to all
cases in which a federal court is asked to provide some
form of discretionary relief. Moreover, as
demonstrated by our decision in Thibodaux, we have not
held that abstention principles are completely
inapplicable in damages actions. Burford might support
a federal court's decision to postpone adjudication of
a damages action pending the resolution by the state
courts of a disputed question of state law.
Id. at 1727-28 (citations and internal quotation marks omitted).
We think the district court's stay order was entirely
appropriate. Rather than abdicate its judicial duty to exercise
its jurisdiction, the district court simply postponed the
exercise of that jurisdiction until the proceedings in the
Commonwealth Court reach their conclusion. This approach retains
the sensitivity for concerns of federalism and comity implicated
by Burford abstention, while preserving appellants' right to
litigate their claims in the federal forum should the
Pennsylvania courts, for jurisdictional or other reasons, fail to
adjudicate them. The entry of a stay rather than a dismissal
prevents those claims from becoming time-barred should
jurisdiction be somehow lacking in the Commonwealth Court, and
the preclusion doctrines of res judicata and collateral estoppel
will prevent their re-litigation in the more likely event that
court proceeds to judgment.
III.
We will accordingly affirm the order of the district court.