The opinion of the court was delivered by: McKENNA, District Judge.
Defendant moves pursuant to Articles III and IV of the
United States Constitution and Fed.R.Civ.P. 12(b)(1) for an
order dismissing the claims in these actions for
lack of subject matter jurisdiction*fn1, or alternatively,
staying or dismissing these actions on abstention grounds.
Defendant's motion requires the Court to resolve a conflict
between the fundamental obligation to exercise federal
jurisdiction and the unique responsibility of the several
states to regulate the pooling of risks.
The Court concludes that it must defer to Ohio's interest in
providing for the equitable liquidation of a domestic insurer.
Abstention is appropriate so that an Ohio court, rather than
a federal forum, can decide and define the comparative rights
of an insolvent Ohio insurer, its parent and its creditors.
Defendant's motion is granted to this extent only, and
Defendant Armco Inc. ("Armco") owns the American Druggists'
Insurance Co. ("ADI"). ADI allegedly owes plaintiffs American
Centennial Insurance Company ("American") and The Burt
Syndicate, Inc. ("Burt") more than $2.2 and $1.2 million
respectively for its share of outstanding losses on various
reinsurance agreements. American and Burt bring declaratory
judgment actions to hold Armco liable for these outstanding
debts of ADI on the theory that Armco's acts rendered ADI its
alter ego. Plaintiffs allege that Armco has abused the
corporate privilege by operating and controlling ADI for its
own self-interest and profit.
ADI is incorporated under Ohio law as a stock fire insurance
company. In April, 1986, ADI was adjudged insolvent and
voluntarily placed into liquidation by the Court of Common
Pleas of Franklin County, Ohio ("Liquidation Court"). The
Liquidation Court appointed and authorized a liquidator,
George Fabe ("Liquidator"), Ohio's Superintendent of
Insurance, to marshal and distribute ADI's assets and to
pursue actions on behalf of ADI and its creditors,
policyholders, shareholders and members against any person.
Shortly thereafter, creditors of ADI began filing claims with
the Liquidator against ADI's assets. Plaintiffs filed claims
for the losses at issue in this litigation.
The Liquidator subsequently entered into settlement
discussions with Armco and its subsidiaries. The Liquidator
sought to obtain a substantial payment by Armco into ADI's
In June, 1986, the Liquidator moved the Liquidation Court to
approve a proposed settlement agreement ("Proposal") with
Armco. The Proposal sought to release all claims which the
Liquidator had authority to bring on his own behalf, and on
behalf of ADI, its creditors, policyholders, shareholders and
members against Armco, its subsidiaries, and their past and
present officers, directors, employees, agents and other
representatives ("Armco Group"). In consideration, Armco
agreed to accelerate total payment on a $6 million note held
by ADI, pay $3.2 million owed to ADI by other Armco
subsidiaries, and contribute an additional $1.8 million to
ADI's estate. Armco also agreed to transfer all its ADI stock
to the Liquidator upon demand. The motion, opposed by various
creditors of ADI, was assigned to a referee, Harold Paddock
The Referee held a hearing on two issues: the authority of
the Liquidator to enter into such a settlement, and whether
the Liquidation Court should approve the Proposal. The Referee
then recommended to the Liquidation Court that the Proposal be
The Referee found that the Liquidator's objective in
agreeing to this settlement with Armco was to compensate
"class 3 creditors." The Liquidator considered reinsureds,
such as plaintiffs, to be "class 4 creditors," for whom "there
was only a slight expectation . . . [of] some small
distribution" from the ADI estate. In deciding whether to sue
or accept Armco's "`take it or leave it'" offer, the
Liquidator chose not to risk payment to "class 3 creditors" of
The Referee was particularly concerned that the
"negotiations" with Armco were, in fact, a "one-sided
auction," with the Liquidator reducing its demand each time
Armco threatened to pay nothing into the ADI estate. The
Referee stated, "[w]hile negotiation and agreement must, of
course, be mutual to be effective and binding, it seems as if
Armco set its own price to walk away from ADI with no further
obligation to anyone."
The Referee concluded that a liquidator cannot release a
creditor's right against a third party not under the
liquidation order, such as the parent of an insolvent
insurance company. The Referee noted that the issue was one of
first impression. He then concluded that a prima facie case
existed that ADI did not have a corporate existence separate
from Armco. He stated, "[t]he wheelings and dealings of Armco
make it appear that ADI became a mere shell dominated by other
companies in the Armco insurance group."
Finally, the Referee presented the Liquidator and Armco with
two options. The Referee stated, "[i]f the liquidator is to
truly protect the interest of all creditors of ADI, it must
either drive a harder bargain than it did regarding Armco's
payment into the estate or settle with Armco without
destroying the right of ADI creditors to pursue independent
claims against a purported wrongdoer, namely Armco." The
Referee recommended to the Liquidation Court that it
disapprove the Proposal unless the Liquidator corrected one of
these two deficiencies.
The Liquidator objected to the Referee's findings and
conclusions, but the Liquidation Court overruled these
objections. The Liquidation Court agreed with the Referee's
findings of fact and conclusions of law, which it adopted in
disapproving the Proposal.
The Liquidator and Armco then reached an amended settlement
agreement ("Release and Agreement"). Armco's financial
contribution to the liquidation estate was to be the same as
in the Proposal. However, the Release and Agreement
specifically excluded from release "[c]laims of creditors and
policyholders of ADI against members of the Armco Group
arising from or relating to ADU."
The Liquidator subsequently moved the Liquidation Court for
approval of the Release and Agreement. In so doing, the
Liquidator, by his counsel James Rishel, stated:
The Liquidator and Armco have focused their
discussions upon restructuring the agreement and
the language of the release so that any claims
which the creditors and the policyholders of ADI
might make against members of the Armco Group
arising from or relating to ADI are not released
by the Liquidator. In essence, the Liquidator and
Armco have followed the recommendation of Referee
Paddock and the order of this Court in
restructuring the settlement.
The Liquidator and Armco have agreed to a
restructured settlement whereby only the claims
which the Liquidator could pursue in his own
right or on behalf of ADI will be released.
The Liquidation Court subsequently approved the Release and
Agreement, while adopting the Referee's findings and
conclusions. Plaintiffs then filed the present actions against
Armco. ADI is still in liquidation.
Armco asserts several arguments in support of its motion.
The Court's decision requires that only two of the issues
raised need discussion: 1) whether, under Ohio law, an alter
ego claim is assertable, outside the liquidation proceeding,
by a creditor of an insolvent insurer against the insurer's
parent; and ...