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October 11, 2005.

GREGORY SERIO, Superintendent of Insurance of the State of New York, as Rehabilitator of FRONTIER INSURANCE COMPANY, Plaintiff,

The opinion of the court was delivered by: MICHAEL DOLINGER, Magistrate Judge


The Insurance Superintendent of the State of New York commenced this lawsuit earlier this year in his capacity as the court-appointed rehabilitator of Frontier Insurance Company.*fn1 He seeks by this litigation to recover premiums allegedly owed to Frontier by defendant Black Davis and Shue Agency ("BDS") under a brokerage contract that authorized BDS to place certain types of insurance with Frontier and required BDS to collect and transmit premiums to the carrier.

BDS in turn has filed a series of counterclaims against plaintiff, on the basis of which it asserts that Frontier owes it substantial sums of money based on a variety of legal theories. The counterclaims include claims of negligence, breach of contract, breach of fiduciary duty, unjust enrichment and defamation. Among the claims asserted by BDS is a contention that Frontier owes it a sum of money representing commissions that it earned in the placement of the insurance in question.

  The Superintendent has moved to stay the counterclaims of BDS based on the abstention principles recognized by the United States Supreme Court in Burford v. Sun Oil Co., 319 U.S. 315 (1943), and its progeny. Specifically, plaintiff contends that claims against Frontier — which is now in a rehabilitation process before the New York State Supreme Court under the provisions of Article 74 of the New York Insurance Law — should be heard exclusively in the state rehabilitation forum. In support of that argument, the Superintendent asserts that adjudication of those counterclaims in this court would interfere with the orderly Article 74 process for putting the affairs of the carrier in order. Alternatively, plaintiff seeks the dismissal of all of the non-contract counterclaims for failure to state a cognizable claim.

  BDS opposes both aspects of plaintiff's motion. It contends that plaintiff has not satisfied the Burford criteria, and that to stay the counterclaims while permitting plaintiff to seek a recovery here against it would be fundamentally unfair and indeed would threaten BDS with financial ruination. It further argues that the counterclaims that it asserts against plaintiff are legally sufficient.

  For the reasons that follow, we grant plaintiff's motion to stay the adjudication of defendant's counterclaims at this time in light of the showing by plaintiff as to the availability of an alternative, state-court forum. We therefore do not address the Rule 12(b) (6) arguments proffered by the parties. We further conclude, however, that any obligation by Frontier to pay withheld commissions to BDS constitutes a proper set-off in this litigation and may therefore be proven by BDS in calculating the amount owed by BDS to Frontier.

  The Pertinent Facts

  Frontier was initially incorporated in 1962 under the name P.T.F. Health Insurance Co. (Declaration of H. Neal Conolly, Esq., executed June 1, 2005, at ¶ 11). In 1977 its name was changed to Frontier, and it began to perform as an insurance carrier. (Id. at ¶¶ 12, 14). Frontier's operations proved relatively profitable, and in 1986 it was acquired by the Frontier Insurance Group, Inc. (Id. at ¶¶ 16-17).

  Although Frontier's business expanded considerably through 1996, by the late 1990s its financial situation had deteriorated, and by the first quarter of 2000 it was operating at a loss of $13.6 million. (Id. at ¶¶ 22, 24). With a net loss of more than $50 million in 2000, Frontier was examined by the New York Insurance Superintendent, who reported that, as of year-end 1999, Frontier was insolvent in the amount of $145,736,693, that its capital was impaired by $150,736,693, and that its required surplus of $6.7 million was impaired by $152,436,693. (Id. at ¶ 28).*fn2

  On March 1, 2001, the New York Insurance Department ordered Frontier to show cause why it should not be subjected to regulatory action, and on March 12 the company stipulated with the Department that its surplus was inadequate in relation to its liabilities and current financial needs. It further agreed not to write any new or renewal insurance policies until authorized by the Department. (Id. at ¶¶ 31-32).

  On August 24, 2001, the Superintendent commenced a rehabilitation proceeding in New York State Supreme Court, New York County under Article 74 of the New York Insurance Law. (Id. at ¶ 34). The court appointed the Superintendent as Frontier's temporary receiver. (Id. at ¶ 35 & Ex. A). On October 15, 2001 the court issued an order designed to govern the rehabilitation process. Under its terms, the court deemed Frontier to be insolvent and authorized the Superintendent

to immediately take possession of its property, conduct its business, including but not limited to settling claims within his sole discretion, take such steps toward the removal of the causes and conditions which made this proceeding necessary as he shall deem wise and expedient, and deal with the property and business of [Frontier] in its name or in the name of the Superintendent as Rehabilitator.
(Id., Ex. A at p. 2). The order also provided, under N.Y. Insur. Law § 7419(b), that "[a]ll persons are enjoined and restrained from commencing or prosecuting any actions, lawsuits, or proceedings against [Frontier] or the Superintendent as Rehabilitator". (Id., Ex. A at p. 3). As further protection, the court ordered that "[a]ll persons are enjoined and restrained from obtaining preferences, judgments, attachments or other liens or making any levy against [Frontier's] assets or any part thereof." (Id.).

  The Superintendent authorized the filing of the current lawsuit in federal court this year as part of his effort to marshal the assets of the carrier. According to plaintiff, the decision to file in this forum was triggered by the expectation that Frontier's claims would be adjudicated more quickly and efficiently here than in state court, thus ensuring reasonably prompt and low-cost recovery of assets belonging to Frontier. (Id. at ¶ 47).

  As for the state-court proceeding, the process of rehabilitation continues, and, according to the Administrator of Frontier, who was appointed by the Superintendent in 2002, it is still not clear whether the company will emerge from rehabilitation as a functioning carrier or will be required to go to liquidation. (Id. at ¶¶ 2, 4. But see Sept. 30, 2005 letter to the Court from William D. Chapman, Esq., at annexed exhs.). The Administrator represents that plaintiff's application for a stay is intended to implement the injunction of the rehabilitation court and to ensure that, by enforcing the centralized claim-adjustment process prescribed by the Insurance Law, the Administrator will be able to minimize the costs of litigation, prevent BDS from ...

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