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Dale M. Wallis, D.V.M., James v. Centennial Insurance Company

January 30, 2012

DALE M. WALLIS, D.V.M., JAMES L. WALLIS, AND HYGIEIA BIOLOGICAL LABORATORIES, INC., A CALIFORNIA CORPORATION,
PLAINTIFFS,
v.
CENTENNIAL INSURANCE COMPANY, INC., A NEW YORK CORPORATION, ATLANTIC MUTUAL INSURANCE, CO., INC., A NEW YORK CORPORATION, DEFENDANTS,



MEMORANDUM AND ORDER RE: MOTION TO STAY AND RELATED COUNTERCLAIMS AND THIRD-PARTY COMPLAINT.

Plaintiffs Dale M. Wallis, James L. Wallis, and Hygieia Biological Laboratories Inc. brought this action against defendants Centennial Insurance Company, Inc. and Atlantic Mutual Insurance Co., Inc. alleging breach of insurance contract, breach of the implied covenant of good faith and fair dealing, and breach of fiduciary duty relating to plaintiffs' professional liability insurance policy. Defendants now move to stay the action pursuant to the Orders of Liquidation issued against both defendants in New York state court.

I. Factual and Procedural Background Plaintiffs filed this action on October 27, 2008,

alleging damages arising from defendants' refusal to pay defense fees and costs in connection with an underlying intellectual property action. (Docket No. 1). On September 14, 2010, the Supreme Court of the State of New York executed an "Order of Rehabilitation of Atlantic Mutual Insurance Company" and an "Order of Rehabilitation of Centennial Insurance Company." (Not. of Rehabilitation Order at 2 (Docket No. 122).) Under the terms of the Orders, defendants were determined to be insolvent and consented to the entry of an order of rehabilitation under New York insurance law. (Id. at 4-12.)

On September 21, 2010, defendants submitted a Notice of Rehabilitation Order to this court and requested a stay of this action for 180 days. (Docket No. 122.) On November 23, 2010, the parties submitted a stipulation providing that the action should be stayed pursuant to the Rehabilitation Order until March 15, 2011. (Docket No. 123.) On December 7, 2010, the court issued an Order in furtherance of the stipulation and stayed this matter until March 15, 2011. (Docket No. 124.)

On April 27, 2011, the Supreme Court of the State of New York issued Orders of Liquidation for defendants that supplanted the prior Orders of Rehabilitation of September 16, 2010. (Joint Status Report at 2:15-16 (Docket No. 126).)

Paragraphs 6 and 7 of both Orders of Liquidation state that, "All persons are enjoined and restrained from commencing or prosecuting any actions" against defendants, and "are enjoined and restrained from obtaining preferences, judgments, attachments or other liens, or making any levy" against defendants. (Id. Exs. 1, 2.)

Pursuant to the court's October 13, 2011, Order, the parties filed a Joint Status Report on November 16, 2011. (Docket No. 126.) Defendants requested that this case be permanently enjoined and plaintiffs requested that the matter be stayed for an additional year. (Id.)

The court held a Status Conference on November 16, 2011. At the Status Conference, the court requested further briefing on whether it was required to grant the stay in light of the Ninth Circuit's holding in Hawthorne Savings F.S.B. v. Reliance Insurance Co. of Illinois, 421 F.3d 835 (9th Cir. 2005), amended by 433 F.3d 1089 (9th Cir. 2006). Since the Status Conference, plaintiffs have retracted their request for a one-year stay and now request that a stay not be ordered. (Pls.' Opp'n to Defs.' Mot. to Stay at 2:4-11 (Docket No. 133).) Plaintiffs state that their change of heart occurred because "Plaintiffs had previously thought a one-year stay was acceptable, but the Defendants now state in their motion that the liquidation 'will likely take years' making the Plaintiffs' suggestion of a shorter stay 'impractical and legally unsupported.'" (Id. at 2:4-6 (quoting Defs.' Mot. to Stay at 1 n.1 (Docket No. 130)).)

II. Discussion

A court may stay proceedings pursuant to a power that is "incidental to the power inherent in every court to control the disposition of the cases on its docket with economy of time and effort for itself, for counsel, and for litigants." Landis v. N. Am. Co., 299 U.S. 248, 254 (1936). A district court's decision to grant or deny a Landis stay is a matter of discretion. See Dependable Highway Express, Inc. v. Navigators Ins. Co., 498 F.3d 1059, 1066 (9th Cir. 2007); Rohan ex rel. Gates v. Woodford, 334 F.3d 803, 817 (9th Cir. 2003). A Landis stay, however, should not be granted "unless it appears likely the other proceedings will be concluded within a reasonable time in relation to the urgency of the claims presented to the court." Leyva v. Certified Grocers of Cal., Inc., 593 F.2d 857, 864 (9th Cir. 1979).

In deciding whether to grant a stay the court must weigh the competing interests of the parties, considering in particular: (1) the possible damage that may result from the grant of a stay, (2) the hardship or inequity a party may suffer in being required to go forward with the case, and (3) the orderly course of justice. CMAX, Inc. v. Hall, 300 F.2d 265, 268 (9th Cir. 1962) (citing Landis, 299 U.S. at 254-55). The burden on the party seeking a stay is reduced when the opposing party will not incur any cognizable damage from the stay. Lockyer v. Migrant Corp., 398 F.3d 1098, 1112 (9th Cir. 2005).

Congress has exempted the insurance industry from virtually all federal regulation, including the federal bankruptcy laws. See 11 U.S.C. § 109(b)(2)-(3). The Supreme Court has affirmed "the supremacy of the States in the realm of insurance regulation." U.S. Dept. of the Treasury v. Fabe, 508 U.S. 491, 500 (1993). In an insurance case, therefore, the court must therefore "decide how a California state court would handle the legal questions at issue." Hawthorne Savings, 421 F.3d at 841.

The Uniform Insurers Liquidation Act ("UILA") was drafted by the National Conference of Commissioners on Uniform State Laws to "resolve some of the complexities of liquidating an insolvent insurance company with assets in multiple states." Levin v. Nat'l Colonial Ins. Co., 806 N.E.2d 473, 476 (N.Y. 2004). UILA has been enacted in California at Insurance Code sections 1064.1 through 1064.12. New York, where defendants are in liquidation proceedings, has also enacted UILA, making it a reciprocal state under UILA's provisions.

In Hawthorne Savings, 421 F.3d 835, the Ninth Circuit Court of Appeals evaluated the application on UILA in circumstances similar to those found in this case. The plaintiff in Hawthorne Savings brought an action against an insurance company in California state court based on state law claims and the action was later removed to federal court. Hawthorne Savings, 421 F.3d at 839. Prior to the completion of the litigation, liquidation proceedings were commenced in Pennsylvania state court against the defendant insurance company. Id. at 840. The Pennsylvania state court's order of liquidation provided that, "All ...


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