Amicus Curiae Brief — Quackenbush v. Allstate Ins. Co.

IN THE

Supreme Court of the

OCTOBER TERM, 1995

CHUCK QUACKENBUSH, INSURANCE COMMISSIONER OF

THE STATE OF CALIFORNIA, IN HIs CAPACITY AS

LIQUIDATOR AND TRUSTEE OF THE MISSION INSUR-

ANCE COMPANY TRUST, MISSION NATIONAL INSUR-

ANCE COMPANY TRUST, ENTERPRISE INSURANCE

COMPANY TRUST, HOLLAND-AMERICA INSURANCE |

COMPANY TRUST AND MISSION REINSURANCE COR-

PORATION TRUST, ; Petitioner,

ALLSTATE INSURANCE COMPANY,

Respondent.

On Writ of Certiorari to the

United States Court of Appeals

for the Ninth Circuit

BRIEF OF THE COUNCIL OF STATE GOVERNMENTS,

NATIONAL CONFERENCE OF STATE LEGISLATURES,

NATIONAL ASSOCIATION OF COUNTIES,

INTERNATIONAL CITY/COUNTY

MANAGEMENT ASSOCIATION,

NATIONAL LEAGUE OF CITIES,

U.S. CONFERENCE OF MAYORS,

AND NATIONAL GOVERNORS’ ASSOCIATION

AS AMICI CURIAE IN SUPPORT OF PETITIONER

RICHARD RUDA *

Chief Counsel

JAMES I. CROWLEY

STATE AND LOCAL LEGAL CENTER

444 North Capitol Street, N.W.

Suite 345

Washington, D.C. 20001

202) 484-4850

* Counsel of Record for the

Amici Curiae

Se:

WILSON - Eras Printine Co.. Inc. - 789-0096 - WASHINGTON. D.C. 20001

QUESTION PRESENTED

Amici will address the following question:

Whether the abstention powers of federal courts

are limited to actions in equity, or alternatively,

whether the exercise of Burford abstention is limited

solely to actions in equity.

(i)

———————————————

TABLE OF CONTENTS

QUESTION PREGENTED ..........2..2.0--00-c-ocecscsececscseeessee

TABLE OF AUTHORITIES 2............2.22.--ccccecceceeceseeseeee

INTEREST OF THE AMICI CURIAE

STATEMENT ......................... Seenenesrunehesieeeweientesecenmenn =

SUMMARY OF ARGUMENT ........... sseutinanncacnes a

LE Se

I. THE FEDERAL COURTS’ AUTHORITY TO

Il.

ABSTAIN [S NOT LIMITED TO ACTIONS

WHICH SEEK EQUITABLE RELIEF ........

A. Burford Abstention Is Not Limited To

Actions Which Seek Solely Equitable Relief.

B. Limiting Burford Abstention To Equitable

Actions Ill Serves The Doctrine’s Vital

BURFORD ABSTENTION IS PROPER IN

SETI :sprenresinnenanentenatepentiintiecemmagngactaapeinnenaeins

GRICE cescvecccassssesszsceve0e: mepeenersnis qncsansnpennensaniase

(iii)

iv

TABLE OF AUTHORITIES

Cases Page

Alabama Pub. Serv. Comm’r. v Southern Ry. Co.,

341 U.S. 341 (1951) —........ een 9, 12, 22, 25

Burford v. Sun Oil Co., 319 U.S. 315 (1943) ........ passim

Canada Malting Co. v. Paterson Steamships, 285

SF 15

Clay v. Sun Ins. Office Ltd., 363 U.S. 207 (1960) .. 10, 11

Colorado River Water Conservation Dist. v. United

States, 424 U.S. 800 (1976) _............. 17

Fair Assessment in Real Estate Ass'n v. McNary,

re a passim

Fornaris v. Ridge Tool Co., 400 US. 41 (1970). 10

Guinness-Harp Corp. v. Jos. Schlitz Brewing Co.,

613 F.2d 468 (2d Cir. 1980) . Perey ) 17

Gulf Oil Corp. v. Gilbert, 330 U.S. 501 (1947) ........ 15

Hawks v. Hamill, 288 U.S. 52 (19383)... 18

In re Utility Oil Corp., 10 F. Supp. 678 (S.D.N-Y.

RRR SE a

Langnes v. Green, 282 U.S. i a= 14

Louisiana Power & Light Co. v. City of Thibodauz,

| 8 fF eee passim

McNeese v. Board of Education, 373 U.S. 668

TESTES EE De Rs EM en BNI eR 17

Midwest Mechanical Contractors, Inc. v. Common-

wealth Constr. Co., 801 F.2d 748 (5th Cir.

FEED scocieceninesielllinssicineicienieniisiiitieaiataiiacnidniinlaaa eae 17

Moses H. Cone Memorial Hosp. v. Mercury Constr.

— + ) ) SF 20

National Private Truck Council, Inc. v. Oklahoma

Tax Comm'n, 115 S.Ct. 2351 (1995) _................. 18

New Orleans Pub. Serv., Inc. v. Council of New

Orleans, 491 U.S. 350 (1989) sieneeeeees : passim

New York v. United States, 112 S.Ct. 2408 (1992) . 9

Penn General Casualty Co. v. Pennsylvania, 294

SF a ee passim

Pennsylvania «. Williams, 294 ‘US. 176 (1935) __ 4, 9, 24,

25

Pennzoil Co. v. Texaco, Inc., 481 U.S. 1 (1987)... 15

Piper Aircraft Co. v. Reyno, 454 U.S. 235 (1981). 15

v

TABLE OF AUTHORITIES—Continued

Page

Prudential Ins. Co. v. Benjamin, 328 U.S. 408

TI scthiccicehtees tate taecaiemiachinnaitieh lat acai 20

Southland Corp. v. Keating, 465 U.S. 1 (1984)... 19

Tezas v. Donoghue, 302 U.S. 284 (1937) — 24

Thompson v. Magnolia Petroleum Co., 309 U.S. 478

ERE RE SRE 8 Se Ee ee 23

United Gas Pipe Line Co. v. Ideal Cement Co., 369

ENCE ape cee a 10

a oo of Treas. v. Fabe, 113 S.Ct.

ERE RE EE eS ee aes 2, 20, 21

Wolfson v. Mutual Benefit Life Ins. Co., 51 F.3d

I 13

Younger v. Harris, 401 U.S. 37 (1971)....__5, 16, 16-17, 18

Statutes

Cal. Ins. Code §§ 1010—1064.12... 6, 8, 21

aS A aS SC Cr 21

Cal. Ins. Code § 1016 . iathiteaiees eo 6 21

EEE Ee ae nee 21

I nee 21

IEE ISA I pees 21

FS Eee 3

Federal Arbitration Act, 9 U. S. |S) as 19

8 EE ee 3

McCarran-Ferguson Act, 15 U.S.C. : 1012(b)_. 20

ET TL AT SNe ON 20-21

RE EET aaa SS

REALE aCe nn ee 3

Other Authorities

71 Am. Jur. 2d Specific Performance (1973) 18

Paul M. Bator et al., Hart and Wechsler’s The Fed-

eral Courts and The Federal System (3d ed.

SAAS as Sas eke ee area 11, 25

John D. Butzner, Jr. & Mary Nash Kelly, Certifica-

tion: Assuring the Primacy of State Law in the

Fourth Circuit, 42 Wash. & Lee L. Rev. 449

AR RET ane A TD ll

81 C.J.S. Specific Performance (1977)... 18

vi

TABLE OF AUTHORITIES—Continued

Kathleen Heald Ettlinger et al., State Insurance

ETT ARIE CREA ES SEER 2,8

The Federalist No. 45 (James Madison) (Isaac

EE Ee TE TIT 5 oe 9

David L. Shapiro, Jurisdiction and Discretion, 60

N.Y.U. L. Rev. 543 (1985) —............ aN A 4, 18, 15, 16

IN THE

Supreme Court of the United States

OCTOBER TERM, 1995

No. 95-244

CHUCK QUACKENBUSH, INSURANCE COMMISSIONER OF

THE STATE OF CALIFORNIA, IN His CAPACITY AS

LIQUIDATOR AND TRUSTEE OF THE MISSION INSUR-

ANCE COMPANY TRUST, MISSION NATIONAL INSUR-

ANCE COMPANY TRUST, ENTERPRISE INSURANCE

COMPANY TRUST, HOLLAND-AMERICA INSURANCE

COMPANY TRUST AND MISSION REINSURANCE CorR-

PORATION TRUST, ; Petitioner,

ALLSTATE INSURANCE COMPANY,

Respondent.

On Writ of Certiorari to the

United States Court of Appeals

for the Ninth Circuit

BRIEF OF THE COUNCIL OF STATE GOVERNMENTS,

NATIONAL CONFERENCE OF STATE LEGISLATURES,

NATIONAL ASSOCIATION OF COUNTIES,

INTERNATIONAL CITY/COUNTY

MANAGEMENT ASSOCIATION,

NATIONAL LEAGUE OF CITIES,

U.S. CONFERENCE OF MAYORS,

AND NATIONAL GOVERNORS’ ASSOCIATION

AS AMICI CURIAE IN SUPPORT OF PETITIONER

INTEREST OF THE AMICI CURIAE

Amici, organizations whose members include state,

county, and municipal governments and officials

throughout the United States, have a compelling in-

2

terest in legal issues that affect state and local gov-

ernments. This case involves an issue at the core of

amici’s interest: whether the discretion of a federal

court to abstain in a case challenging state regulatory

authority is limited to suits in equity.

Congress has granted the States broad authority to

regulate the business of insurance. See United States

Dept. of Treas. v. Fabe, 113 S.Ct. 2202, 2207 (1993).

Pursuant to this authority, the States have enacted

comprehensive and complex regulatory schemes in-

cluding procedural and substantive provisions govern-

ing the liquidation of insolvent insurers. A liquida-

tion “can involve billions in assets, hundreds of prod-

ucts, and thousands of policyholders spread over the

world,” Kathleen Heald Ettlinger et al., State Insur-

ance Regulation 221 (1995), as well as hundreds of

reinsurance agreements with entities located through-

out the world. State liquidation schemes generally

designate the state insurance commissioner as liquida-

tor and require all creditors (whether policyholders,

reinsurers, or general creditors) to file any claims in

the state receivership court and authorize the court to

enjoin the prosecution of all other actions. The exer-

cise of federal court jurisdiction thus has great poten-

tial to disrupt the orderly conduct of state liquidation

proceedings and delay the final distribution of the

estate.

Because of the importance of the issues raised in

this case for both abstention doctrine generally and

the conduct of insurer liquidation proceedings, amici

submit this brief to assist the Court in its resolution

of the case.’

! The parties have consented to the filing of this brief amicus

curiae. Letters indicating their consent have been filed with

the Clerk of the Court.

3

STATEMENT

This case arises out of the California Insurance

Commissioner’s nearly decade-long effort to liquidate

the Mission Group of insurance companies. The Mis-

sion Group insolvency is one of the largest in U.S.

history, involving hundreds of thousands of policy

holders in all 50 States and hundreds of reinsurance

agreements made with entities located throughout the

United States and in more than two dozen foreign

countries. Pet. 2. More than 180,000 claims have

been filed in the liquidation proceedings by policy-

holders, third party claimants, reinsurers, and state

guaranty associations seeking billions of dollars. /d.

at 7.

Pursuant to the statutory duty to collect the debts

due the various Mission companies’ estates, see Cal.

Ins. Code § 1037, the Commissioner brought this ac-

tion in California Superior Court (the duly appointed

receivership court) against respondent Allstate Insur-

ance Company to recover sums owed under various

reinsurance agreements to the Mission Insurance

Company, one of the entities in liquidation. Pet. App.

14a-15a. Allstate invoked diversity jurisdiction, sce

28 U.S.C. § 1332, to remove the action to federal dis-

trict court. Pet. App. 15a.

Once in federal district court, Allstate moved under

Section 4 of the Federal Arbitration Act, 9 U.S.C.

§ 4, to compel the specific performance of arbitration

clauses contained in the various reinsurance agree-

ments. Pet. App. 15a. The district court put the

motion off calendar and instead heard and granted

the Commissioner’s motion to abstain under the prin-

ciples of Burford v. Sun Oil Co., 319 U.S. 315 (1943).

Pet. App. 23a-24a. Allstate appealed. Jd. at 4a.

4

The court of appeals reversed. Notwithstanding

that Allstate had sought as relief the specific per-

formance of the arbitration clauses contained in the

various reinsurance agreements, the court character-

ized the case as one “in which no equitable relief is

sought.” Pet. App. 2a. While the court of appeals

acknowledged that this Court has “explicitly ex-

panded some forms of abstention to a few ‘special’

classes of damages actions,” it reasoned that the au-

thority of federal courts to abstain “is founded upon

a discretion they possess only in equitable cases.” /d.

at lla. It further reasoned that this Court’s decision

in New Orleans Pub. Serv., Inc. v. Council of New

Orleans, 491 U.S. 350 (1989) (NOPSI), “gave strong

indication that the power to abstain under Burford

should not apply in suits at law.” Pet. App. 12a. The

court of appeals thus reversed the district court’s

abstention order and remanded the case for further

proceedings. Id.

SUMMARY OF ARGUMENT

1. Burford abstention is not limited to actions

which seek solely legal relief. The Court has long

held that in deciding whether to exercise their statu-

torily granted jurisdiction, the federal courts must

give “proper regard for the rightful independence of

state governments in carrying out their domestic pol-

icy.” Pennsylvania v. Williams, 294 U.S. 176, 185

(1935). Thus, while most of the Court’s decisions

upholding abstention have been premised on the tradi-

tional discretion exercised by courts of equity in de-

ciding whether to grant relief, the Court has recog-

nized that a federal court’s authority to abstain is not

rooted merely in the “technical rule[s] of equity pro-

cedure [but] reflect[s] a deeper policy derived from

our federalism.” Louisiana Power & Light Co. v.

City of Thibodaux, 360 U.S. 25, 28 (1959).

5

The Court has thus instructed that in deciding

whether to abstain, lower federal courts must con-

sider such faetors as the complexity of state law is-

sues, the potential for disruption of the State’s system

of policy and review, and whether the State has pro-

vided an adequate forum. See Burford, 319 U.S. at

331-34. The Court has further recognized that even

an action at law can be so disruptive of state auton-

omy as to warrant abstention. See Thibodaux, 360

U.S. at 28-30; Fair Assessment in Real Estate Ass’n

v. McNary, 454 U.S. 100, 113-17 (1981).

Contrary to the reasoning of the court of appeals,

this Court’s decision in NOPSI does not foreclose

abstention in an action at law. NOPSI did not in-

volve an action at law and simply did not consider

the question. Moreove., the NOPSI Court’s discussion

of the state regulatory body’s assertions that absten-

tion was appropriate under either Burford or Younger

v. Harris, 401 U.S. 37 (1971), reaffirms that there is

no per se rule prohibiting abstention in actions at

law. As the NOPSI Court noted, Younger abstention

“was based partly on traditional principles of equity

but rested primarily on the ‘even more vital consider-

ation’ of comity.” 491 U.S. at 364 (quoting 401 U.S.

at 43-44). And in discussing the state agency’s

Burford claim, the Court reiterated that abstention

is appropriate “when there are ‘difficult questions of

state law bearing on policy problems of substantial

public import’ ” or when “ ‘federal review of the ques-

tion in a case and in similar cases would be disruptive

of state efforts to establish a coherent policy with re-

spect to a matter of substantial public concern.’” 491

U.S. at 361 (citation omitted).

2. Weighing the relevant state and federal inter-

ests at issue here demonstrates why the district

6

court’s abstention order should be reinstated. All-

state’s asserted right to compel arbitration of its

dispute can be raised in the state court proceedings.

Allstate has made no showing that the California

courts are inadequate for the protection of its right.

In contrast, California has a substantial interest in

conducting the Mission liquidations in state court free

from federal interference. California has exercised

its authority under the McCarran-Ferguson Act to

enact a comprehensive scheme regulating the “busi-

ness of insurance” and has adopted complex provi-

sions governing the liquidation of insolvent insurers

and the rights and liabilities of various classes of

creditors. See Cal. Ins. Code $§ 1010—1064.12. The

State has also appointed a receivership court which

has exercised its authority to enjoin interference with

the various liquidation proceedings.

The court of appeals, however, gave no considera-

tion to the State’s substantial interest in having

issues arising in the liquidation proceedings be re-

solved by the receivership court. Nor did it consider

whether the state liquidation proceedings provided

Allstate with an adequate forum. And most signifi-

cantly, the court of appeals did not consider the com-

plexity of the state law issues and the frustration of

the State’s policy which could potentially result from

federal court intervention.

The Court, however, has long recognized a policy

of federal court non-intervention in state insurer

liquidation proceedings. See Penn General Casualty

Co. v. Pennsylvania, 294 U.S. 189, 197-99 (1935).

And it has not required the presence of an unclear

issue of state law in ordering abstention in such

cases. See id. But if the, “proper regard for the right-

7

ful independence of state governments in carrying

out their domestic policy,” Williams, 294 U.S. at 185,

requires abstention in such cases even when there

are no unclear issues of state law, it must surely

do so here where issues of great importance to the

State’s policy remain unsettled.

ARGUMENT

I. THE FEDERAL COURTS’ AUTHORITY TO AB-

STAIN IS NOT LIMITED TO ACTIONS WHICH

SEEK EQUITABLE RELIEF

This Court has long recognized that the statutes

conferring jurisdiction on the federal courts must be

read against the common law background of exer-

cising a principled discretion in deciding whether

to hear a particular case. See NOPSI, 491 U.S. at

359 (citing David L. Shapiro, Jurisdiction and Dis-

cretion, 60 N.Y.U. L. Rev. 5438, 570-77 (1985));

Thibodaux, 360 U.S. at 30; Burford, 319 U.S. at

317-18. Thus, while the Court has characterized the

obligation of federal courts to hear a case within

their jurisdiction as “ ‘virtually unflagging,’” and

said that abstention is “ ‘the exception, not the rule,’ ”

NOPSI, 491 U.S. at 359 (citations omitted), it has

recognized that there are some cases in which the

interests of federalism and comity require the fed-

eral courts to decline to exercise their jurisdiction.

See Shapiro, Jurisdiction and Discretion, 60 N.Y.U.

L. Rev. at 551.

The court of appeals, however, gave no considera-

tion to California’s substantial interest in conducting

the Mission liquidations in a unified proceeding in

its own courts. Instead, the court relied solely on

the formalistic notion that abstention is appropriate

only when a federal court is called upon to exercise

its equitable powers. But as explained below, the

purpose of the Burford doctrine—the prevention of

undue interference with state policy—would be ill

served by a rule limiting its application to suits in

equity, for under some circumstances an action for

damages can disrupt state policy to the same degree

as a suit for an injunction. The Court has long recog-

nized as much and thus, contrary to the view of the

court of appeals, has not imposed such a rigid limi-

tation on the federal courts’ authority to abstain.

Rather, even in actions at law the Court has engaged

in a careful examination of the relevant state and

federal interests and ordered abstention when dam-

ages actions would unduly disrupt a State’s well or-

ganized system of regulation and review. See Fair

Assessment, 454 U.S. at 113-16.

This is such a case. As explained below, the reg-

ulation of insurance insolvency is a matter of exclu-

sive state interest. See 11 U.S.C. § 109(b) (2) & (d)

(excluding insurance companies from the coverage of

the federal bankruptcy code); Ettlinger, State In-

surance Regulation at 210. The statutory schemes

governing the liquidation of a failed insurer involve

complex procedural and substantive provisions, see

Ettlinger, State Insurance Regulation at 220-21; Cal.

Ins. Code §§ 1010-1064.12, and can, as here, in-

volve difficult and unsettled issues of state law which

should be decided in the first instance by the state

courts. The federal courts should therefore abstain

under the principles articulated in Burford and

Thibodaux.

Ee er

9

A. Burford Abstention Is Not Limited To Actions

Which Seek Solely Equitable Relief

Our constitutional system is founded on the rec-

ognition that the States possess sovereign authority

over “all the objects which, in the ordinary course of

affairs, concern the lives, liberties, and properties

of the people.” The Federalist No. 45, at 296

(James Madison) (Isaac Kramnick ed. 1987). Even

today, in an era in which “interstate commerce has

become ubiquitous” and “activities once considered

purely local have come to have effects on the national

economy, and have accordingly come within the scope

of Congress’ commerce power,” New York v. United

States, 112 S. Ct. 2408, 2419 (1992), the States con-

tinue to exercise substantial regulatory authority over

numerous activities.

The Court has thus long recognized that in de-

ciding whether to exercise their statutorily granted

jurisdiction, the federal courts must give “proper

regard for the rightful independence of state govern-

ments in carrying out their domestic policy.” Penn-

sylvania v. Williams, 294 U.S. at 185; Burford, 319

U.S. at 318. To be sure, many of the Court’s cases

upholding abstention have been premised on the his-

toric discretion exercised by courts of equity in de-

ciding whether to grant or deny relief. See, e.g.,

Burford, 319 U.S. at 332-34. The Court, however,

has made clear that a federal court’s authority to

abstain is not rooted in the “technical rule[s] of equity

procedure [but] reflect[{s] a deeper policy derived

from our federalism.” Thibodaux, 360 U.S. at 28;

see also NOPSI, 491 U.S. at 364; Alabama Pub. Serv.

Comm’n v. Southern Ry. Co., 341 U.S. 341, 349-50

(1951).

10

These federalism interests are especially signifi-

cant where, as here, a federal court is called upon to

interpret the provisions of a complex state regula-

tory scheme. See, e.g., Burford, 319 U.S. at 327-28;

cf. Thibodaux, 360 U.S. at 30. As the Court has

observed, in such situations “the federal courts can

make [but] small contribution to [a State’s] well

organized system of regulation and review... .

[d]elay, misunderstanding of local law, and needless

federal conflict with the State policy, are the inevi-

table product of this double system of review.” Bur-

ford, 319 U.S. at 327. As the Court further ob-

served in Thibodaux, a federal court should “ascer-

tain the meaning of a disputed state statute from

the only tribunal empowered to speak definitively—

the courts of the State... rather than . . . make

a dubious and tentative forecast.” 360 U.S. at 29.

The Court’s admonitions are founded on the rec-

ognition that, under our constitutional system, a fed-

eral court does not speak as the ultimate interpreter

of a State’s statutory scheme. See Thibodaux, 360

U.S. at 29-30.° An erroneous determination by the

federal courts on an important issue of statutory

2 See also Fornaris v. Ridge Tool Co., 400 U.S. 41, 42-44

(1970) (per curiam) (instructing lower federal courts to

abstain in damages action brought under diversity jurisdic-

tion until the Puerto Rico Supreme Court interpreted unclear

provision of commonwealth’s law); United Gas Pipe Line Co.

v. Ideal Cement Co., 369 U.S. 134, 185 (1962) (per curiam)

(vacating judgment of court of appeals in damages action

brought under diversity jurisdiction on ground that con-

trolling state law issue should be decided by the state courts) ;

Clay v. Sun Ins. Office Ltd., 363 U.S. 207, 212 (1960) (vacat-

ing judgment of court of appeals in damages action brought

under diversity jurisdiction on ground that state courts might

interpret state law to avoid constitutional question).

11

construction can have a profound effect on a State’s

policy and result in the reordering of the balance

struck in the State’s legislative and regulatory proc-

esses. Moreover, under our federal system such a

determination cannot be appealed to the State’s su-

preme court.’ While such a decision presumably

would be the law of the case as between the parties

involved, state courts are not required to give prece-

dential effect to an erroneous federal court interpre-

tation of state law. See Thibodaux, 360 U.S. at 30.

And while a subsequent state court decision might

eventually make clear to federal courts the proper

meaning of a state statute, the frustration of the

State’s policy caused by the erroneous construction

will already have been done.‘

* Amici acknowledge that the Court has, in some instances,

directed the lower federal courts to certify questions of state

law to the state supreme court. See, e.g., Clay, 363 U.S. at

212. Certification, however, is discretionary and utilized

rarely. See John D. Butzner, Jr. & Mary Nash Kelly, Cer-

tification: Assuring the Primacy of State Law in the Fourth

Circuit, 42 Wash. & Lee L. Rev. 449, 455 (1985) (estimating

that out of 23,000 cases filed in Fourth Circuit, the procedure

was used less than six times). See also Paul M. Bator et ai.,

Hart and Wechsler’s The Federal Courts And The Federal

System 1382 (3d ed. 1988) (noting “the danger that the cer-

tified question will be badly drafted, too abstract, or misunder-

stood by the state court, or that the federal court wil! be

unsure of the significance of the answer”). While certifica-

tion may be adequate in some circumstances, it is inappropri-

ate in cases challenging complex regulatory schemes.

* Burford demonstrates that these concerns are not merely

theoretical. As the Court explained:

The most striking example of misunderstanding has

come where the federal court has flatly disagreed with

the position later taken by a State court as to State law.

In those cases, the federal court attributed a given mean-

ing to the state statute which went to the heart of the

12

B. Limiting Burford Abstention To Actions Which

Seek Solely Equitable Relief Ill Serves The Doc-

trine’s Vital Purposes

The Court’s cases thus make clear that the prin-

ciples of federalism and comity require that the lower

federal courts, in deciding whether to abstain, con-

sider such factors as the complexity of the state law

issues, the potential for disruption of the State’s sys-

tem of policy and review, and whether the State has

provided an adequate forum. See, e.g., Burford, 319

U.S. at 333-34; Alabama Pub. Serv. Comm’n, 341

U.S. at 349-50. The vital federalism concerns that

underlie Burford abstention can be equally as press-

ing solely legal relief.” Jd. at 8a. In the court of ap-

tions that seek a mixture of legal and equitable relief.

The court of appeals, however, gave no considera-

tion to the purposes underlying Burford abstention

or whether the state forum was inadequate. See Pet.

App. 8a-12a. Instead the court categorically held

that “Burford abstention does not apply to suits seek-

ing solely legal relief.” Jd. at 8a. In the court of ap-

peals’ view, the abstention orders in Burford and

Alabama Pub. Serv. Comm’n were premised solely

on the historic discretion of courts of equity to refuse

control program. The ‘Texas} Court of Civil Appeals

disagreed, but before ultimate review could be had either

in Texas or here, the legislature amended its statutes

so that the cases became moot. Had the Texas Civil

Appeals decision come first, it would have been unneces-

sary to make the changes which were made in an effort

to stay within the limit thought by the Governor of Texas

to have been set by the tone of the federal court’s opin-

ion. The Texas legislature later changed the law back

to its original state, as clear an example of wasted motion

as can be imagined.

319 U.S. at 327-28 (citations and footnotes omitted).

13

to grant relief. Jd. at 9a-10a. And according to the

court, “NOPS/ suggests a renewed recognition that

the power of federal courts to abstain from exercis-

ing their jurisdiction, at least in Burford abstention

cases, is founded upon a discretion they possess only

in equitable cases.” Jd. at lla.

To be sure, many of the Court’s abstention cases

have rested on the traditional discretion which courts

of equity exercise in deciding whether to grant or

deny relief. But as the Court has made clear in

numerous cases, abstention doctrine is not limited to

suits seeking equitable relief but applies as well to

actions at law which would unduly intrude on state

sovereignty. See Thibodaux, 360 U.S. at 28-30; see

also Fair Assessment in Real Estate Ass’n v. Me-

Nary, 454 U.S. 100 (1981). As the Court explained

in Thibodaux, “[t]hese prior cases have been cases

in equity, but they did not apply a technical rule of

equity procedure. They reflect a deeper policy de-

rived from our federalism.” 360 U.S. at 28. And a

leading authority observes:

Many of these abstention cases involved claims

for equitable relief, and in some instances the

Supreme Court has invoked traditional equity

principles to justify the decision not to proceed.

But the cases have not been confined to actions

in equity, and it is hard to see why they should

be. The form of relief sought may have some

bearing on the reasons for not proceeding, but it

is certainly not the sine qua non of a decision to

abstain. ... To confine this form of discretion

to equitable actions makes little sense, especially

in a merged system.

Shapiro, Jurisdiction and Discretion, 60 N.Y.U. L.

Rev. at 551-52; see also Wolfson v. Mutual Benefit

Life Ins. Co., 51 F.34 141, 147 (8th Cir. 1995).

14

Thus, in Thibodaux the Court upheld a district

court’s order staying federal jurisdiction over an

eminent domain proceeding, notwithstanding that the

action was at law, because of an unclear issue of

state law and “[t]he special and peculiar nature” of

the proceeding. Jd. at 28. As the Court further ob-

served, “[t]he considerations that prevailed in con-

ventional equity suits for avoiding the hazards of

serious disruption by federal courts of state govern-

ment or needless friction between state and federal

authorities are similarly appropriate in a state emi-

nent domain proceeding brought in, or removed to,

a federal court.” /d.

And in Fair Assesment the Court upheld the dis-

missa! of a taxpayers’ suit for damages brought in

federal court under section 1983. In so holding the

Court noted “the important and sensitive nature of

state tax systems and the need for federal-court re-

straint when deciding cases that affect such systems.”

454 U.S. at 102. The Court further recognized that

even though the taxpayers were seeking only mone-

tary relief, the federal court’s award of that relief

would be tantamount to a declaratory judgment and

“would be fully as intrusive as the equitable actions

that are barred by principles of comity.” See 454

U.S. at 113. Notwithstanding that the taxpayers’

claims were premised on asserted violations of their

federal rights, the Court consigned them to the state

forum. /d. at 116. Cf. Langnes v. Green, 282 U.S.

531, 540-44 (1931) (ordering federal admiralty

court to abstain to allow plaintiff to proceed with

suit in state court).°

* The court of appeals’ view that abstention “is founded

upon a discretion [federal courts] possess only in equitable

cases,” Pet. App. lla, is also irreconcilable with the doctrine

15

Thus, contrary to the view of the court of appeals,

this Court has never held that a federal court’s au-

thority to abstain is limited to cases seeking equitable

relief. Instead the Court has taken a pragmatic ap-

proach recognizing that damages actions can be just

as disruptive of state sovereignty as suits in equity

and that “‘[t]he various types of abstention are not

rigid pigeonholes into which federal courts must try

to fit cases.’”” NOPSI, 491 U.S. at 359 (quoting

Pennzoil Co. v. Texaco, Inc., 481 U.S. 1, 11 n.9

(1987)). The Court has accordingly engaged in a

careful examination of the relevant state and federal

interests when called upon to review whether the

of forum non conveniens, under which actions at law have

been routinely dismissed on the ground that the exercise of

federal court jurisdiction would be inappropriate. See Piper

Aircraft Co. v. Reyno, 454 U.S. 235, 257-61 (1981) (upholding

federal district court’s dismissal of damages action brought

under diversity jurisdiction on ground that the suit should

be tried in foreign forum); Gulf Oil Corp. v. Gilbert, 330 U.S.

501, 512 (1947) (upholding federal district court’s authority

to dismiss damages action brought under diversity jurisdic-

tion on ground that suit should be heard in another State) ;

Canada Malting Co. v. Paterson Steamships, 285 U.S. 413,

417, 423-24 (1982) (affirming federal admiralty court's dis-

cretion to dismiss damages action within its jurisdiction on

grounds that case should be heard in foreign forum). See

generally Shapiro, /urisdiction and Discretion, 60 N.Y.U. L.

Rev. at 555-57.

If the doctrine of forum non conveniens permits a federal

court to dismiss a damages action, it is difficult to understand

why its close relation of abstention, should be limited to suits

in equity, particularly given the role the States play in our

constitutional system. See Gulf Oil, 330 U.S. at 505 (“On

substantially forum non conveniens grounds we have required

federal courts to relinquish decision of cases within their

jurisdiction where the court would have to participate in the

administrative policy of a state.”’).

16

lower federal courts should abstain in a particular

case. See Shapiro, Jurisdiction and Discretion, 60

N.Y.U. L. Rev. at 582-83.

Nor is there any merit to the court of appeals’

view that NOPS/ changed this. NOPSI did not in-

volve a claim for damages but rather claims for the

equitable remedies of injunctive and declaratory re-

lief. See 491 U.S. at 353. It is thus implausible to

suggest, as the Ninth Circuit did, that the Court was

overruling the pragmatic approach of cases such as

Fair Assessment and Thibodaux, which make clear

that the nature of the relief sought is not the sine

qua non of abstention. NOPSI simply did not con-

sider the question.

Moreover, NOPSI’s discussion of the state regula-

tory body’s assertion that abstention was appropriate

under either Burford or Younger v. Harris, 401 U.S.

37 (1971), indicates that the Court was not overrul-

ing sueh cases as Fair Assessment and Thibodaux to

hold that abstention is always inappropriate in cases

seeking legal relief. See generally 491 U.S. at 360-

73. To the contrary, the Court’s discussion of the

Younger doctrine noted that the holding “was based

partly on traditional principles of equity but rested

primarily on the ‘even more yital consideration’ of

comity.” 491 U.S. at 364 (quoting Younger, 401

U.S. at 44) (internal citation omitted). The Court

further explained:

this includes “a proper respect for state func-

tions, a recognition of the fact that the entire

country is made up of a Union of separate state

governments, and a continuance of the belief

that the National Government will fare best if

the States and their institutions are left free to

17

perform their separate functions in their sep-

arate ways.”

Id. (quoting Younger, 401 U.S. at 44).

Similarly, the NOPSI Court’s rejection of the

state agency’s Burford claim reiterated that Burford

abstention is appropriate “when there are ‘difficult

questions of state law bearing on policy problems of

substantial public import whose importance trans-

cends the result in the case then at bar’; or . . . 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 re-

spect to a matter of substantial publie concern.’”

491 U.S. at 361 (quoting Colorado River Water Con-

servation Dist. v. United States, 424 U.S. 800, 814

(1976)). In NOPSI there was simply no “state-law

claim” at issue, “nor even an assertion that the fed-

eral claims are ‘in any way entangled in a skein of

state-law that must be untangled before the federal

case [could] proceed.’” Jd. at 361 (quoting McNeese

v. Board of Education, 373 U.S. 668, 674 (1963) )."

* The Commissioner has framed the second question in the

petition based on the court of appeals’ characterization of

this case as one “in which no equitable relief is sought.” See

Pet. App. 2a. But the relief Allstate seeks in federal court—

an order compelling arbitration—is not properly character-

ized as legal in nature. As several courts of appeals have

noted, a motion to compel arbitration “is a request that the

court compel specific performance of an agreement to arbi-

trate.” Midwest Mechanical Contractors, Inc. ». Common-

wealth Constr. Co., 801 F.2d 748, 750 (5th Cir. 1986); see

also Guinness-Harp Corp. v. Jos. Schlitz Brewirg Co., 613

F.2d 468, 472 (2d Cir. 1980). As such, Allstate’s claim is

equitable in nature, see Guinness-Harp, 613 F.2d at 473, and

is governed by the rules applied by courts of equity in suits

for specific performance. See In re Utility Oi Corp., 10

18

As the foregoing demonstrates, a federal court’s

authority to abstain is not limited to those cases

which seek solely equitable relief. Indeed, given our

F. Supp. 678, 680 (S.D.N.Y. 1934); ef. 81 C.J.S. Specific Per-

formance § 6, at 705 (1977) (“The granting of specific per-

formance is governed by the elements, conditions, and in-

cidents which control the administration of all equitable

remedies, and specific performance will be ordered only on

equitable grounds in view of all the conditions surrounding

the particular case.”) (footnote omitted). See also 71 Am.

Jur. 2d Specific Performance § 4, at 13 (1973).

One of the fundamental principles of federal equity juris-

prudence is that a federal court must exercise its equitable

jurisdiction with due regard for the rightful independence

of state governments. See Burford, 319 U.S. at 317-18; Penn

General Casualty Co. v. Pennsylvania, 294 U.S. 189, 197

(1935). As the Court stated in Burford:

Although a federal equity court does have jurisdic-

tion of a particular proceeding, it may, in its sound

discretion . . . “refuse to enforce or protect legal rights,

the exercise of which may be prejudicial to the public

interest,” for it “is in the public interest that federal

courts of equity should exercise their discretionary power

with proper regard for the rightful independence of state

governments in carrying out their domestic policy.”

319 U.S. at 317-18 (footnote and citations omitted); see also

Hawks v. Hamill, 288 U.S. 52, 60-61 (1983). Cf. National

Private Truck Council, Inc. v. Oklahoma Tax Comm’n, 115

S.Ct. 2351, 2354-57 (1995) (discussing policy of federal

non-interference with state tax administration); Younger

v. Harris, 401 U.S. 37, 43-45 (1971) (discussing policy of

federal non-interference with state court proceedings).

While in deciding whether to abstain a federal court must

also consider whether the State has provided an adequate

forum, see, e.g., Burford, 319 U.S. at 334, where, as here,

there has been no credible showing that the state liquidation

proceeding is inadequate for the protection of Allstate's

rights, the federal courts should abstain in favor of it. See

Penn Gen. Casualty, 294 U.S. at 197.

19

merged system of law and equity such a rule is in-

compatible with the purposes of the Burford doctrine.

It is likewise incompatible with the Court’s recogni-

tion that even an action for damages can unduly dis-

rupt state autonomy so as to warrant abstention. Of

course, suits seeking equitable relief are more fre-

quently strong candidates for abstention than those

which seek only damages. Nonetheless, the Court

has long made clear that the nature of the relief

sought is only one of several factors that a federal

court must consider in determining whether to

abstain.

Il. BURFORD ABSTENTION IS PROPER IN THIS

CASE

The court of appeals thus erred in failing to take

into consideration the relevant state and federal] in-

terests at issue here. An examination of these inter-

ests demonstrates that the federal interest invoked

by Allstate is too insubstantial to defeat California’s

strong interest in resolving in its own courts the

issues raised by Allstate’s assertion of the right to

setoff. The district court’s abstention order should

therefore be reinstated.

Allstate invokes the jurisdiction of the federal

courts to compel the arbitration of its dispute with

the State under the Federal Arbitration Act, 9 U.S.C.

$§ 1-16. See Br. Opp. at 19. But even if there is any

issue in this dispute which is subject to arbitration,

the right to seek an order compelling arbitration is

enforceable in California’s courts. See Southland

Corp. v. Keating, 465 U.S. 1, 10-16 (1984). That

Congress, in enacting the Federal Arbitration Act,

did not deem it necessary to “create any independent

federal-question jurisdiction” to hear a suit to compel

20

arbitration, Moses H. Cone Memorial Hosp. v. Mer-

cury Constr. Corp., 460 U.S. 1, 25 n.32 (1983), dem-

onstrates that a federal forum is not essential to the

vindication of the federal interest at issue here.

In contrast, California’s interest in conducting the

Mission liquidations and resolving this dispute in its

own courts is substantial. Congress has granted the

States broad authority under the McCarran-Ferguson

Act to regulate the “business of insurance” from

creation to dissolution. 15 U.S.C. §1012(b); see

also Fabe, 113 S.Ct. at 2204." Consistent with the

Congressional judgment that insurer liquidation pro-

ceedings are a matter of exclusive state interest, fed-

eral bankruptcy law specifically excludes insurers

from the entities which are subject to it. See 11

U.S.C. § 109(b) (2) & (d).*

™The Court has observed that “ ‘Congress’ purpose was

broadly to give support to the existing and future state sys-

tems for regulating and taxing the business of insurance.’ ”

Fabe, 113 S.Ct. at 2207 (quoting Prudential Ins. Co. v.

Benjamin, 328 U.S. 408, 429 (1946)). The Court has further

observed that the McCarran-Ferguson Act “‘declar[es] ex-

pressly and affirmatively that continued state regulation and

taxation of this business is in the public interest and that the

business and all who engage in it ‘shall be subject to’ the

laws of the several states in these respects.’” Jd. (quoting

Benjamin, 328 U.S. at 430). ;

® In the related area of state taxation, the Court has relied

on the policies underlying the Tax Injunction Act to prohibit

taxpayers from bringing damages actions in the federal

courts, notwithstanding the Act’s textual focus on equitable

remedies. See Fair Assessment, 454 U.S. at 109-10. Here,

the McCarran-Ferguson Act’s re-affirmation of state author-

ity to regulate insurance, see 15 U.S.C. § 1012(b), and the

Federal Bankruptcy Code’s specific exclusion of insurance

companies from the entities subject to it, see 11 U.S.C.

21

California, like all States, has relied on the broad

authority granted it in the McCarran-Ferguson Act,

15 U.S.C. §1012(b), to enact “a complex and spe-

cialized administrative structure for the regulation of

insurance companies from inception to dissolution.”

Fabe, 113 S.Ct. at 2204; see generally Cal. Ins. Code.

As part of this regulatory structure, California has

established a comprehensive and intricate scheme for

liquidating insolvent insurers, see id. §§ 1010-1064.12,

which includes, most significantly, provisions estab-

lishing the priority in which claims on the insurer’s

estate are to be paid, see id. § 1033, and the circum-

stances in which creditors can assert setoffs. See id.

§ 1031.

Demonstrative of the State’s substantial interest

in conducting the Mission liquidations free from fed-

eral interference, California law provides for the

appointment of a receivership court and vests title

to all of the insurer’s assets in the State for disposi-

tion in the liquidation. See id. §§ 1011, 1016. Fur-

chermore, state law authorizes the receivership court

to enjoin “[i]nterference with the commissioner or

the proceeding,” “[t]he institution or prosecution of

any actions or proceedings,” and “[t]he obtaining of

preferences, judgments, attachments, or other liens

against [the insolvent insurer] or its assets,” id.

§ 1020, a power which was exercised here. See Pet.

App. 119a-2la (Order Appointing Liquidator And

Restraining Order).

§ 109(b) (2) & (d), provide a similar manifestation of the

strong federal policy against federal court interference with

insurer liquidation proceedings so long as those proceedings

adequately protect a claimant’s rights.

22

The court of appeals, however, gave no consider-

ation to the State’s substantial interest in having

issues arising in the course of the liquidation proceed-

ings be resolved by the receivership court (which

through the course of the lengthy conservation and

liquidation proceedings has acquired unique exper-

tise in the statutory scheme) subject to review by the

State’s intermediate appellate and supreme courts.

Cf. Burford, 319 U.S. at 327 (“[c]Joncentration of

judicial supervision of [agency] orders permits the

state courts, like the [agency] itself, to acquire a

specialized knowledge which is useful in shaping the

policy of regulation”). Nor did the court of appeals

consider whether the state liquidation proceedings

failed to provide Allstate with an adequate forum.

See Alabama Pub. Serv. Comm’n, 341 U.S. at 349

(“As adequate state court review of an administra-

tive order based upon predominantly local factors is

available to appellee, intervention of a federal court

is not necessary for the protection of federal rights.’’)

(footnote omitted ).

But most significantly, the court of appeals did not

consider the complexity of the state law issues and

the potential for frustration of the State’s policy

caused by the federal court’s intervention. Indeed,

the harm caused by the frustration of the State’s

policy would be especially significant in this case.

The state law issues implicated in this dispute in-

clude, inter alia, whether Allstate is entitled to set off

reinsurance recoverables owed to its NESCO sub-

sidiary by the Mission Insurance Company and in

which, if any, of the five Mission liquidation estates

the setoff can be asserted. These issues are complex

and go to the core of California’s policy. See Pet. Br.

5-6, Pet. App. 8a-9a. As the district court explained:

23

If Allstate prevails on its set-off defense, it could

deduct the set-off figure directly from the total

amount it owes to the Mission companies under

the reinsurance agreements. If Allstate’s set-off

claims are unsuccessful, then it would pay all

amounts owed to Mission up front, and Allstate’s

set-off claims would be treated like any other

Class 6 creditor claim against the Mission assets.

Practically speaking, then, resolution of this

issue will dramatically impact on who ultimately

receives the Mission assets.

Pet. App. 15a. Whatever the correct resolution of this

state law issue, the risk of getting it wrong is sub-

stantial enough to warrant abstention on the part of

the federal courts.®

This Court has recognized that notwithstanding the

existence of jurisdiction, federal courts should not

interfere with state insurer liquidation proceedings.

See Penn General Casualty Co. v. Pennsylvania, 294

U.S. 189, 197-99 (1935). In Penn General Casualty,

a shareholder of an insurer had invoked diversity

jurisdiction to bring suit in federal court seeking the

appointment of a receiver and the liquidation of the

*In the analogous area of bankruptcy, a federal court

exercises “exclusive and nondelegable control over the admin-

istration of an estate in its possession.” Thompson v. Mag-

nolia Petroleum Co., 309 U.S. 478, 483 (1940). The Court

has nonetheless instructed federal bankruptcy courts to sub-

mit to state courts “particular controversies involving unset-

tled questions of State property law ... arising in the

course of bankruptcy administration.” I/d.; see also id. at 484

(“Unless the matter is referred to the State courts, upon

subsequent decision by the [State Supreme Court] it may

appear that rights in local property of parties to this proceed-

ing have—by the accident of federal jurisdiction—been deter-

mined contrary to the law of the State which in such matters

is supreme.”).

24

company. /d. at 191-92. Three weeks later, the state

insurance commissioner initiated proceedings in state

court to liquidate the company. /d. at 192. Notwith-

standing that the federal court suit had been brought

first and that the federal court had acquired jurisdic-

tion over the assets of the insolvent insurer and had

authority to proceed on the claim, the Court observed :

Although the District Court has thus acquired

jurisdiction, the end sought by the litigation in

the state court is the liquidation of a domestic

insurance company by a state officer. In the ab-

sence of a showing that the interests of creditors

and shareholders would not be adequately pro-

tected by this procedure, the case was a proper

one for the District Court, in the exercise of

judicial discretion, to relinquish the jurisdiction

in favor of the administration by the state

officer.

Id. at 197. Cf. Pennsylvania v. Williams, 294 U.S.

176, 183 (1935) (liquidation of bank under state

regulation; Court holding that “the discretion of the

District Court, invoked by the petition of the com-

monwealth, should have been exercised to relinquish

the [federal court’s] jurisdiction in favor of the stat-

utory administration of the corporate assets by the

state officer”’ ) .”°

To similar effect is Texas v. Donoghue, 302 U.S. 284

(1937), which involved a bankrupt oil company. The Court

held that the federal bankruptcy court abused its discretion

when it denied Texas leave to proceed with a suit seeking

forfeiture of oil produced by the company which was brought

in state court for violation of the State’s conservation laws.

See 302 U.S. at 286-89. As the Court recognized, “[f)or-

feiture of unlawful oil under Texas law is a penalty imposed

to vindicate the State’s policy of conservation.” Jd. at 288.

25

Of further significance, in neither Penn General

Casualty or Williams was the Court’s instruction to

the lower federal courts premised on the need to ab-

stain because of an unclear issue of state law. See

generally Penn General Casualty, 294 U.S. at 197;

Williams, 294 U.S. at 184-86; cf. Alabama Pub. Serv.

Comm'n, 341 U.S. at 346-50 (ordering abstention not-

withstanding the absence of unclear state law issues

on grounds “that regulation of intrastate railroad

service [was] primarily” a state concern and State

had provided an adequate system of review) (interna!

quotation and citation omitted); Hart & Weschler at

1365. But if the “proper regard for the rightful in-

dependence of state governments in carrying out their

domestic policy,” Williams, 294 U.S. at 185, required

abstention even in the absence of any unclear issues

of state law, it must surely do so here, where issues

of great importance to the State’s policy remain

unsettled.

CONCLUSION

The judgment of the court of appeals should be

reversed.

Respectfully submitted,

RICHARD RUDA *

Chief Counsel

JAMES I. CROWLEY

STATE AND LOCAL LEGAL CENTER

444 North Capitol Street, N.W.

Suite 345

Washington, D.C. 20001

(202) 434-4850

* Counsel of Record for the

November 30, 1995 Amici Curiae