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August 15, 1979

Richard L.Mathias, as Director of Insurance of the State of Illinois, Plaintiff,
John F. Lennon, as Rehabilitator of Empire Mutual Insurance Company, James W. Dowling, as Agent of the Rehabilitator of Empire Mutual Insurance Company, and Empire Mutual Insurance company, a New York corporation, Defendants.

The opinion of the court was delivered by: LASKER

This action arises out of the insolvency of Empire Mutual Insurance Company, a company incorporated and having its principal place of business in New York State. Richard L. Mathias, the Director of Insurance of the State of Illinois, sues on behalf of all policyholders of Empire, asserting that actions taken by the Rehabilitator of Empire have discriminated in favor of New York policyholders at the expense of Empire's Illinois insureds, in violation of New York and Illinois insurance law and numerous provisions of the federal Constitution. The defendants move to dismiss the complaint under Rule 12(b), Fed.R.Civ.P., for lack of subject matter jurisdiction and for failure to state a claim upon which relief can be granted.

I. Background

The bulk of Empire's business is conducted in New York State; the complaint estimates that approximately 250,000 (80%) of Empire's outstanding insurance contracts are issued to New York residents. However, Empire is also authorized to do business in other states, including Illinois where, as of August of 1977, it had issued 2,553 policies, primarily to cover automobile and fire loss. (FAC P 17)* Mathias estimates that claims from Illinois policies represent $ 1,100,000 of Empire's gross liabilities for loss reserves and that the unearned premiums on these policies amount to $ 400,000. (FAC P 18)

 There is no dispute as to Empire's dire financial condition. As of December, 1976, Empire's capital impairment approximated $ 13 million. On August 30, 1977, John F. Lennon, New York State's Superintendent of Insurance, petitioned in New York State Supreme Court for an order, pursuant to Article XVI of New York's Insurance Code, N.Y.Ins.Law §§ 510-546, appointing him Rehabilitator of Empire. On August 31st, Justice Sidney H. Asch of the Supreme Court, New York County, issued an order which, Inter alia, adjudged Empire to be insolvent; appointed Lennon Rehabilitator of the company with authority to control its assets and conduct its business; and provided that all insurance contracts held by policyholders outside of New York State be cancelled as of October 7, 1977. (Ex. 2 to the FAC)

 Notice of the proposed cancellations was mailed to all policyholders affected by the order on September 26, 1977. On September 30th, Mathias moved this court by order to show cause for a preliminary injunction barring Empire from proceeding with the cancellations as to the Illinois policyholders. The application was denied in an oral decision because of this court's serious doubts as to the existence of diversity jurisdiction upon which the bulk of the complaint was based; as to whether the relief requested was not prohibited by 28 U.S.C. § 2283 (the "antiinjunction statute"); and because principles of comity rendered it inappropriate to issue an order directly contradicting the decree of the state court. (Transcript of October 7, 1977, pp. 4-7)

 Since the decision on October 7, 1977, Mathias has amended his complaint to eliminate one count and base each of the remaining counts on both federal question and diversity jurisdiction. Defendants now move to dismiss the amended complaint.

 II. Issues Raised by the Complaint

 In the McCarran-Ferguson Act, 15 U.S.C. §§ 1011-1015, Congress entrusted the regulation of insurance to the individual states. Id. § 1012. The claims made in the complaint here arise out of several of these state regulatory schemes, including the New York and Illinois Insurance Codes as well as the Uniform Insurers' Liquidation Act (the Uniform Act), which has been adopted by both states.

 As a condition to obtaining a Certificate of Authority to do business in Illinois, Empire agreed to conduct its business in compliance with Illinois' insurance laws. The Illinois Insurance Code, the complaint alleges, prohibits cancellation of policies extending automobile or fire insurance except upon certain enumerated grounds none of which is applicable to the cancellation here and sets out minimum procedural requirements as a precondition to a valid termination. See Ill.Rev.Stat. ch. 73, §§ 755.11-755.24. In addition to these safeguards, Illinois policyholders are protected by the provisions of the Uniform Act which, Mathias alleges, require equal treatment for policyholders of any insurer placed in a "delinquency proceeding" *fn1" when those policyholders are located in a "reciprocal state", that is, one which has enacted the uniform law. Id. §§ 833.1-833.13.

 New York, the complaint continues, has at all times relevant to the events in question here had in effect the Uniform Act as part of its own insurance law, see N.Y.Ins.Law §§ 517-24, and therefore New York and Illinois are "reciprocal states" whose citizens are entitled to equality of treatment. Mathias relies specifically on § 522(1) of New York's Insurance Law which provides that:

"In a delinquency proceeding against an insurer domiciled in this state, claims owing to residents of ancillary states shall be preferred claims if like claims are preferred under the laws of this state. All such claims whether owing to residents or nonresidents shall be given equal priority of payment from general assets regardless of where such assets are located."

 The amended complaint seeks a declaration that defendants' "preferential and discriminatory" action in cancelling the contracts of Illinois policyholders violates the above provisions of New York and Illinois insurance law; the Uniform Act, the Full Faith and Credit and Privileges and Immunities Clauses of Article IV of the United States Constitution; and the Equal Protection and Due Process Clauses of the Fourteenth Amendment. In addition, the complaint seeks a permanent injunction prohibiting any acts of preferential treatment of New York, as compared to Illinois, residents, and barring defendants from terminating any policies in effect in Illinois except in accordance with the procedural requirements of Illinois law.

 III. The Motion to Dismiss

 The motion to dismiss rests on a multiplicity of arguments, most of which were raised earlier in opposition to Mathias' application for a preliminary injunction. Briefly stated, the Rehabilitator contends that various jurisdictional barriers prevent this court from considering the dispute, including (a) the state court's exclusive jurisdiction over the subject matter of the complaint; (b) the doctrine of abstention; and (c) lack of diversity jurisdiction. Defendants also assert that the complaint fails to state a claim upon which relief can be granted because, Inter alia, (a) the injunctive relief requested is barred by 28 U.S.C. § 2283; (b) principles of comity and Full Faith and Credit require deference to the state court decree; and (c) the rehabilitation order issued by the state Supreme Court does not give preferential treatment to New York residents as alleged. In the event the motion is denied, defendants seek a stay of this action "pending a determination of the state court".

 A. Subject Matter Jurisdiction

 Defendants contend that the state court has exclusive jurisdiction over the subject matter of this dispute. They rely on a long line of cases holding that, when two lawsuits with substantially the same purpose are instituted in separate courts, the second court to acquire jurisdiction must, under certain circumstances, relinquish jurisdiction to the first. See United States v. Bank of New York & Trust Co., 296 U.S. 463, 56 S. Ct. 343, 80 L. Ed. 331 (1936); Penn General Casualty Co. v. Pennsylvania, 294 ...

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