AXA Corporate v. Underwriters Reinsur ( 2003 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
Nos. 02-3795 & 02-3959
AXA CORPORATE SOLUTIONS,
Plaintiff-Appellant/Cross-Appellee,
v.
UNDERWRITERS REINSURANCE CORPORATION,
Defendant-Appellee/Cross-Appellant.
____________
Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 02 C 3016—Joan Humphrey Lefkow, Judge.
____________
ARGUED FEBRUARY 27, 2003—DECIDED OCTOBER 17, 2003
____________
Before KANNE, DIANE P. WOOD, and EVANS, Circuit
Judges.
DIANE P. WOOD, Circuit Judge. This case involves dueling
lawsuits in Illinois and Texas; our task is to decide whether
the federal district court in Illinois should have abstained
as a matter of federal law, whether an Illinois statute
designed to prevent wasteful and duplicative litigation in
the state’s courts applies, and whether the proper response
is to continue with the Illinois case, to stay the Illinois case,
or to dismiss it altogether. Behind all this is the motion
picture financing industry—specifically, certain products
2 Nos. 02-3795 & 02-3959
called insurance-backed film financing. The participants in
this business include the lenders to the film producers,
insurers for the lenders, and reinsurers for the insurers.
One of those insurers was Underwriters Reinsurance
Company (URC), which agreed to insure a five-picture
Master Facility to which Chase Manhattan Bank had
loaned funds. AXA Corporate Solutions (AXA) agreed to
reinsure part of that risk. Acrimony broke out among all
parties, which led to a suit brought by AXA against URC in
the Northern District of Illinois, and then to a suit by Chase
against URC and the reinsurers other than AXA in Texas
state court. Later, URC brought a third-party complaint
against AXA in the Texas action.
Faced with this mess, URC moved in the Illinois action
for a stay or dismissal under the abstention principles set
forth in Colorado River Water Conservation District v.
United States, 424 U.S. 800 (1976), or alternatively under
735 ILL. COMP. STAT. 5/2-619(a)(3), an Illinois state statute
providing for discretionary dismissal of a complaint if there
is another action pending between the same parties cover-
ing the same claim. The district court found Colorado River
abstention inappropriate, but it concluded that the Illinois
statute was sufficiently “substantive” that it had to be ap-
plied in this diversity case, and moreover that it required
the dismissal of AXA’s suit against URC. AXA appeals, and
URC has cross-appealed from the district court’s refusal to
order a stay under Colorado River in the alternative. We
conclude that it was error to dismiss the action based on the
state law, but that the district court did not abuse its
discretion in concluding that Colorado River abstention was
inappropriate here. The case must therefore return to the
district court for further proceedings.
I
At the heart of these business arrangements was the
motion picture company George Litto Productions. Chase
Nos. 02-3795 & 02-3959 3
had loaned money to Litto, and URC issued a Cash Flow
Insurance Policy insuring Chase against shortfalls in the
repayments of the Litto loans. In 1997, AXA (a French
corporation with its principal place of business in Paris,
France) entered into a contract with URC (a New Hamp-
shire corporation with its principal place of business in
California), in which AXA agreed to reinsure URC for a por-
tion of its obligations under the Cash Flow policy. As part
of the deal, Chase and URC insisted that the reinsurers
each sign a Loss Payee Endorsement that would permit
Chase to collect directly on the policy.
AXA’s agreement to reinsure the transaction was made on
the express condition that the reinsurance contract would
include a provision requiring all disputes to be settled in
New York courts under New York law. In order to meet this
obligation, URC ideally would have issued its insurance
policy in New York. It later learned, however, that it did not
have the necessary license to issue policies in New York,
and so it proposed to issue the policy in Texas with the
inclusion of a provision providing for New York law and
jurisdiction. The latter proved to be impossible, after the
Texas Department of Insurance informed URC in October
1998 that it would not approve a policy calling for New York
law and jurisdiction. Without advising AXA or any other
reinsurer of this complication, URC went ahead with the
Texas policy, which included a forum selection clause
providing for Texas jurisdiction and Texas law. Later, in
1999, URC did the same thing again for a scaled-down film
project, once again asking the Texas regulators to approve
a clause choosing New York courts and law, and once again
settling for a clause choosing Texas courts and law.
AXA found out in late June or early July 1999 that URC
had not been forthcoming with it, and that the contracts
specified did not have the necessary choice of law and forum
clauses. It immediately informed URC that the provisions
4 Nos. 02-3795 & 02-3959
calling for Texas law and fora were unacceptable, and it
threatened to pull out of the deal. URC urged it to stay,
pointing out that the insurers would not face any real risk
until the first film was delivered, approximately a year
later. During the interim period, URC promised, it would
change the state in which the policy was issued to one that
would approve the choice of New York. Illinois was one can-
didate. URC contacted the Illinois Department of Insurance
to find out what its position would be; it then represented
to AXA that the Illinois authorities would approve a policy
calling for New York law and jurisdiction. AXA agreed to
go forward on the condition that URC promptly file in
Illinois, use its best efforts to obtain clauses choosing New
York law and New York courts, or, failing that, Illinois law
and Illinois courts. URC agreed to all of this, both orally
and in writing. But in the end it refused to make the prom-
ised refiling in Illinois and instead contacted AXA and de-
manded that AXA accept a number of alterations to the
contract required by a side agreement URC had arranged
with Chase in the meantime. When AXA refused to agree to
these revisions, the lawsuits began.
In October 1999, AXA sued Chase in New York state
court seeking a declaration that it was not liable to Chase
for any losses relating to the secured loans. The case was
then consolidated with a similar action Chase had brought
against AXA. Things did not go well for AXA: Chase ulti-
mately won a declaration that AXA was in fact on the hook
for the secured loans, and a New York state appeals court
affirmed, Chase Manhattan Bank v. AXA Reinsurance, 741
N.Y.S.2d 867 (N.Y. App. Div. 2002). On April 26, 2002, AXA
brought this case against URC in the Northern District of
Illinois, seeking rescission of the contract, a declaratory
judgment that URC was liable for any losses sustained by
Chase, and damages. On the same day, Chase sued URC
and several other reinsurers (but not AXA) in Texas state
court. URC responded with, among other things, a third-
party complaint against AXA. URC then asked the Illinois
Nos. 02-3795 & 02-3959 5
district court for a stay or dismissal under Colorado River
or under § 2-619(a)(3), the Illinois statute that authorizes
dismissal where “there is another action pending between
the same parties for the same cause.” The district court re-
fused to abstain under Colorado River, but it granted URC
full dismissal under § 2-619(a)(3).
II
Because the district court’s ruling under § 2-619(a)(3) had
the effect of disposing of the entire case, we begin with the
question whether that ruling was correct. If so, AXA’s case
in Illinois is at an end; if not, the question remains whether
Colorado River abstention was proper, or if the case should
proceed despite the existence of the parallel Texas action.
The relevant portions of § 2-619(a)(3) read as follows:
Involuntary dismissal based upon certain defects or de-
fenses. (a) Defendant may, within the time for pleading,
file a motion for dismissal of the action or for other ap-
propriate relief upon any of the following grounds.
***
(3) That there is another action pending between the
same parties for the same cause.
735 ILL. COMP. STAT. 5/2-619(a).
In deciding a § 2-619(a)(3) motion, Illinois courts consider
a range of factors that closely resemble those that a feder-
al court would consider under Colorado River (which we
discuss in more detail below). These include “comity; the
prevention of multiplicity, vexation, and harassment; the
likelihood of obtaining complete relief in the foreign juris-
diction; and the res judicata effect of a foreign judgment
in the local forum.” May v. SmithKline Beecham Clinical
Labs., Inc., 710 N.E.2d 460, 463 (Ill. App. Ct. 1999). Illinois
state courts also evaluate whether the case bears a “legiti-
6 Nos. 02-3795 & 02-3959
mate and substantial relation to Illinois.” A.E. Staley Mfg.
Co. v. Swift & Co., 419 N.E.2d 23, 27 (Ill. 1980). In most
cases, the analysis comes down to a simple weighing of
“the prejudice to the nonmovant if the motion is granted
against the policy of avoiding duplicative litigation.” Kapoor
v. Fujisawa Pharm. Co., 699 N.E.2d 1095, 1100 (Ill. App.
Ct. 1998); see also Crain v. Lucent Techs., Inc., 739 N.E.2d
639, 647 (Ill. App. Ct. 2000). Moreover, in contrast to the
“unflagging obligation” of district courts to exercise jurisdic-
tion and also the “exceptional” nature of the entry of a stay
under Colorado River, 424 U.S. at 813, 817, the dismissal
provisions of § 2-619(a)(3) “should be construed liberal-
ly.”Vill. of Mapleton v. Cathy’s Tap, Inc., 729 N.E.2d 854,
856 (Ill. App. Ct. 2000).
The overriding issue is whether this statute, which re-
lates so closely to the use to which Illinois wishes to put its
courts, is the kind of law that a federal court sitting in
diversity must apply, or if it is sufficiently procedural in na-
ture that the federal court must turn instead to the analo-
gous federal rules. This is often referred to as the distinc-
tion between “substantive” issues and “procedural” issues
in cases applying the doctrine first announced in Erie
Railroad Co. v. Tompkins, 304 U.S. 64 (1938), although
both those terms should be understood as shorthand for a
more complex inquiry. That inquiry requires courts to refer
to the twin aims of the Erie doctrine, which are to discour-
age forum-shopping and to avoid the inequitable adminis-
tration of laws. See generally Houben v. Telular Corp., 309
F.3d 1028, 1032-36 (7th Cir. 2002) (collecting cases); see
also Gasperini v. Ctr. for Humanities, Inc., 518 U.S. 415,
427-28 (1996); Hanna v. Plumer, 380 U.S. 460, 468 (1965);
Byrd v. Blue Ridge Rural Elec. Coop., Inc., 356 U.S. 525,
536-37 (1958); Guar. Trust Co. of N.Y. v. York, 326 U.S. 99,
109 (1945).
There can be no doubt that both § 2-619(a)(3) and the
Colorado River doctrine address the general problem of
Nos. 02-3795 & 02-3959 7
duplicative litigation. Under Colorado River, a federal court
may stay or dismiss a suit when there is a concurrent state
court proceeding and the stay or dismissal would promote
“wise judicial administration.” 424 U.S. at 818. Substan-
tially the same parties must be litigating the same issues
contemporaneously in the two (or more) fora. (It may be
worth noting that the federal courts do not face the same
problems if the parallel litigation is in another federal
court, because devices such as 28 U.S.C. § 1404(a) and
28 U.S.C. § 1407 exist for the total or partial consolidation
of related cases from different districts.) Colorado River
then goes on to outline numerous factors that the court
should consider as it weighs what step is appropriate for
the particular situation.
Section 2-619(a)(3) addresses precisely the same problem.
The choice Illinois has made, however, is different from the
choice the federal courts have made. For example, the dis-
missal provisions of the state statute are construed liber-
ally, while the Supreme Court has made it clear that
Colorado River abstention must be reserved for exceptional
circumstances. 424 U.S. at 813. This difference would give
rise to substantial variation in outcomes between federal
and state litigation, which might suggest that § 2-619(a)(3)
should be applied by a federal court in a case governed
by state law, in order to avoid forum shopping. See Semtek
Int’l Inc. v. Lockheed Martin Corp., 531 U.S. 497, 508-09
(2001); Guar. Trust, 326 U.S. at 109-10.
AXA argues that a determination that § 2-619(a)(3) is
inapplicable in federal court will not reduce the total
amount of forum shopping in the system as a whole, but
will merely shift forum shopping from the “vertical” (be-
tween federal and state courts) to the “horizontal” (among
federal courts). We are not so naive as to believe that
lawyers will not try to exploit whatever differences they
may perceive among the federal circuits at any given time.
Nevertheless, those differences are ultimately subject to
8 Nos. 02-3795 & 02-3959
reconciliation by the Supreme Court, if they are not cured
by the transfer devices that exist or through the rule-mak-
ing process. Differences that are attributable to the duty of
federal courts to follow state law, under the Rules of De-
cision Act, 28 U.S.C. § 1652, will induce only the vertical
form of forum shopping.
The district judge was not alone in finding that the dif-
ferences between Colorado River abstention doctrine and
§ 2-619(a)(3) are sufficient to require the federal court to
follow the state statute, just as it would follow a state rule
prescribing damages for a breach of contract. Many district
judges have arrived at the same conclusion, see Praxair,
Inc. v. Slifka, 61 F.Supp.2d 753, 758 (N.D. Ill. 1999); Brach
& Brock Confections, Inc. v. Redmond, 988 F.Supp. 1106(N.D. Ill. 1997); Northbrook Prop. & Cas. Ins. Co. v. Allen-
dale Mut. Ins. Co., 887 F.Supp. 173 (N.D. Ill. 1995); Ball
v. Deere & Co., 684 F.Supp. 1455 (C.D. Ill. 1988), although
not all have done so, see Basic v. Fitzroy Eng’g, Ltd., 949
F.Supp. 1333 (N.D. Ill. 1996); Fofi Hotel Co., Inc. v. Davfra
Corp., 846 F.Supp. 1345 (N.D. Ill. 1994); W.E. O’Neil Const.
Co. v. Nat’l Union Fire Ins. Co., 721 F.Supp. 984 (N.D. Ill.
1989). But not everything that might lead to forum-shop-
ping requires the application of state law. Parties might
prefer the notice-pleading regime of the Federal Rules of
Civil Procedure over the fact-pleading approach that pre-
vails in Illinois courts, but no one thinks that the Illinois
rules of pleading are binding on the federal courts. As long
as Rule 8 of the Federal Rules of Civil Procedure is a valid
rule under the Rules Enabling Act, 28 U.S.C. § 2072 (and
we have no reason to question it), Hanna makes it clear
that the federal court must follow the federal rule. Venue
rules, jury rules, discovery rules, and countless other proce-
dural rules that are found in the federal Constitution, stat-
utes, and rules, also influence forum choice. Even so, ever
since Congress repealed the Conformity Act, it has been un-
Nos. 02-3795 & 02-3959 9
derstood that the federal courts are entitled to make their
own choices about the ways in which cases will proceed.
In our view, the problem addressed by § 2-619(a)(3) is
closely akin to topics such as forum non conveniens, lis
pendens, and venue statutes. Each of those areas addresses
an organizational matter that is governed by the law of the
sovereign that established the forum. In the case of a feder-
al court, that sovereign is obviously the United States. We
see no way for a federal court simultaneously to follow the
Supreme Court’s Colorado River doctrine and to apply the
rule of § 2-619(a)(3). Given that conflict, and given the pro-
cedural nature of this problem, we conclude that the state
statute should not have played any role in the decision
whether to retain or dispose of this litigation. We naturally
express no opinion on the question whether the facts of this
case would have merited dismissal under § 2-619 (a)(3).
III
Because it was error to dismiss this case based on the
state statute, we must consider whether the district court
should have abstained under Colorado River. As we have
already noted, a federal court may stay or dismiss a suit
when there is a concurrent state proceeding and the stay
or dismissal would promote “wise judicial administration.”
Colorado River, 424 U.S. at 818. The two suits at issue
must be parallel, meaning that “substantially the same
parties are contemporaneously litigating substantially the
same issues in another forum.” Caminiti & Iatarola, Ltd. v.
Behnke Warehousing Inc., 962 F.2d 698 (7th Cir. 1992) (in-
ternal quotation marks and citations omitted). Once that
determination has been made—and in this case, the “paral-
lel” requirement is undisputed by the parties—a court must
take ten separate factors into consideration in deciding
whether or not to abstain:
10 Nos. 02-3795 & 02-3959
(1) whether the state has assumed jurisdiction over
property; (2) the inconvenience of the federal forum; (3)
the desirability of avoiding piecemeal litigation; (4) the
order in which jurisdiction was obtained in the concur-
rent forums; (5) the source of governing law, state or
federal; (6) the adequacy of state-court action to protect
the federal plaintiff’s rights; (7) the relative progress of
state and federal proceedings; (8) the presence or ab-
sence of concurrent jurisdiction; (9) the availability of
removal; and (10) the vexatious or contrived nature of
the federal claim.
Id. at 701 (quoting LaDuke v. Burlington N. R.R., 879 F.2d
1556, 1559 (7th Cir. 1989)). Although the sheer number of
factors to be considered creates the risk of unpredictable
and inconsistent results, the Supreme Court has effectively
told courts how those factors should be weighed. It has
cautioned that abstention is appropriate only in “excep-
tional circumstances,” Colorado River, 424 U.S. at 813, and
has also emphasized that federal courts have a “virtually
unflagging obligation . . . to exercise the jurisdiction given
them,” id. at 817. Following this guidance, we have recog-
nized a general presumption against abstention. Sverdrup
Corp. v. Edwardsville Cmty Unit Sch. Dist. No. 7, 125 F.3d
546, 549-50 (7th Cir. 1997).
We review the district court’s conclusion that abstention
was inappropriate for abuse of discretion. Id. at 548-49. The
court thought that at least seven of the ten Colorado River
factors were either absent or otherwise weighed against
abstention. It observed that the dispute between AXA and
URC does not involve property over which the court has
exercised jurisdiction (factor 1); that the state and federal
actions at issue were filed on the same day (factor 4); that
no rights of AXA as the federal plaintiff will go unprotected
in the event of a stay (factor 6); that the federal proceedings
had progressed farther than the Texas proceedings (factor
7); that the state and federal courts possess concurrent ju-
Nos. 02-3795 & 02-3959 11
risdiction over the dispute (factor 8); that AXA, as a third-
party defendant, has no removal option (factor 9); and that
there was no evidence of vexatious motive (factor 10). Only
three factors pointed in favor of abstention; these were the
source of the governing law (factor 5), the inconvenience of
the federal forum (factor 2), and the desirability of avoiding
piecemeal litigation (factor 3). The district court found that
the fact that only state-law claims were at issue did not
carry much weight, because it had jurisdiction in any event
because of the diversity of the parties. As to the latter two
factors, the court concluded that “because the Texas Action
is more comprehensive and because Illinois lacks connection
to this case, the court is persuaded that Illinois is not a
more convenient forum than Texas.” The district court
concluded that these concerns were simply not enough to
constitute “exceptional circumstances,” and refused to enter
a stay.
The district court’s careful consideration of the Colorado
River factors is entitled, in a sense, to double deference,
once we apply both the abuse of discretion standard of
review and the presumption against abstention that the
Supreme Court established in Colorado River. The court
was aware that there are powerful reasons for giving pre-
cedence to the Texas proceeding: all the parties are there,
in one capacity or another, and there is no special expertise
an Illinois federal court can bring to bear that would out-
weigh the efficiencies inherent in the ability to consider the
case as a whole. Yet that cannot be enough; otherwise, the
Court would not have stressed the “unflagging obligation”
of the federal courts to hear cases properly before them.
What AXA will lose if the Illinois federal case is stayed or
dismissed is the opportunity to litigate in a federal forum—
an opportunity to which it is entitled under 28 U.S.C.
§ 1332, in the absence of extraordinary circumstances.
Moreover, it is hard to see what more AXA could have done
to make it clear that it was not consenting to litigate in
12 Nos. 02-3795 & 02-3959
Texas. It may be true that the traditional justification for
diversity jurisdiction—protecting foreign companies from
potentially biased state courts—is weak on these facts. See
Guar. Trust, 326 U.S. at 111-12; Firstar Bank, N.A. v. Faul,
253 F.3d 982, 991 (7th Cir. 2001). AXA is a French company
with its principal place of business in Paris; URC is a New
Hampshire corporation with its principal place of business
in California. Neither party is a citizen of Texas, and there
is no particular reason to think that the Texas courts will
be predisposed to favor one outsider against another. On
the other hand, diversity litigants are not second-class citi-
zens, see Evans Transp. Co. v. Scullin Steel Co., 693 F.2d
715, 717 (7th Cir. 1982) (“[W]e are not free to treat the di-
versity litigant as a second-class litigant.”). Nor has the
Supreme Court interpreted § 1332 in a way that requires a
finding of potential prejudice in state court before federal
court jurisdiction will be sustained.
In the end, this case turns on how seriously we take the
admonition from the Supreme Court not to stay or dismiss
actions without strong justification to do so. In that spirit,
we can see no reason to disagree with the district court’s
ultimate conclusion rejecting Colorado River abstention.
This is not, we stress, because we have any lack of confi-
dence in the ability of the Texas courts to conduct a full and
fair adjudication of the issues, including the choice of law
issue. AXA has insinuated that the Texas courts will not
live up to this standard, but this is pure speculation that we
expressly disavow. See Finova Capital Corp. v. Ryan
Helicopters U.S.A., Inc., 180 F.3d 896, 900 & n.4 (7th Cir.
1999) (noting that the district court was entitled to conclude
that the courts of another forum are equipped to resolve the
dispute at issue). Nonetheless, AXA properly filed this case
in federal court, and it is entitled to its federal forum.
Should the Texas court complete its proceedings first, the
parties will undoubtedly call that to the district court’s
attention and consider whether the doctrine of issue
preclusion applies.
Nos. 02-3795 & 02-3959 13
IV
We REVERSE the district court’s dismissal of AXA’s action
and REMAND for further proceedings consistent with this
opinion.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—10-17-03
14 Nos. 02-3795 & 02-3959