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In a pair of recent decisions stemming from the Pennsylvania state takeover of Reliance Insurance Co., the federal courts have split on the question of whether lawsuits brought by Pennsylvania Insurance Commissioner M. Diane Koken against an out-of-state defendant may be removed to federal court or must remain in the Pennsylvania Commonwealth Court. In both cases, Koken filed suit in Commonwealth Court seeking to recover funds paid out by Reliance during the period after it was placed under supervision but prior to the Commonwealth Court’s October 2001 ruling that declared Reliance insolvent. The suits sought rulings that, under Pennsylvania law, the payments were “preferential” payments that Koken, as Reliance’s liquidator, can void. Both defendants removed the cases to federal courts — one to the Middle District of Pennsylvania, where it was assigned to U.S. District Judge Yvette Kane, the other to the Eastern District where it was assigned to U.S. District Judge Anita B. Brody. Koken’s lawyers responded by asking both federal judges to remand the cases to Commonwealth Court, arguing that the federal courts lack jurisdiction because the Commonwealth Court has in rem jurisdiction over Reliance’s assets. On Feb. 9, Kane sided with Koken and remanded the case, Koken v. Denis, finding that the Princess Lida doctrine applied, requiring the federal court to yield jurisdiction to the Commonwealth Court because the funds at issue were under its in rem jurisdiction. Kane found that “the object of the voidable preference claim here is the alleged preferential payment amount held by defendants as re-insurer, and thus the preference action involves adjudication of the parties’ respective rights in the insolvent’s property.” As a result, Kane concluded that “jurisdiction in the federal court … would disturb and interfere with the Commonwealth Court’s control and in rem jurisdiction over the underlying liquidation proceedings.” But in an opinion handed down Monday, Brody disagreed and found that Koken v. Viad Corp. must remain in federal court because it was properly removed by an Arizona defendant and the funds at issue are not “a specific piece of Reliance’s property.” As a result, Brody found that the Princess Lida doctrine does not apply since the court is not exercising in rem jurisdiction, but rather in personam jurisdiction. “If the commissioner is victorious in the underlying action, Viad will not be returning the same check or dollar bills it received from Reliance. The payment received by Viad from Reliance is not a sequestered nor distinguishable piece of property,” Brody wrote. Brody’s ruling is a victory for Viad’s lawyers — George M. Vinci and Tina L. Colman of Spector Gadon & Rosen — who argued that they removed the suit to federal court because the issues relate to “an area of law with which the federal courts are much more familiar than the state courts: the recovery of alleged preferential payments by a fiduciary of an insolvent entity.” In the suit before Kane, the insurance commissioner alleges that Reliance paid out more than $1 million in a reinsurance agreement. In the suit before Brody, the commissioner alleges that Viad Corp., as an insured of Reliance, was paid more than $1.9 million in February 2001 under an agreement executed in December 2000. In her eight-page opinion, Kane concluded that a remand to Commonwealth Court “enhances judicial efficiency” because it would allow the state court to “dispose of a matter in direct relation to the ongoing liquidation process overseen by that court.” But Brody rejected both of Koken’s arguments for remand. Koken’s lawyers — Brian J. Slipakoff and Larry H. Spector of Wolf Block Schorr & Solis-Cohen — argued that since the Commonwealth Court has exclusive jurisdiction over all of Reliance’s assets, the case was improperly removed. They also argued that a federal court should “abstain” from hearing the case under the Burford doctrine, named for a 1943 decision from the U.S. Supreme Court which holds that a federal court sitting in equity must decline to interfere with the proceedings or orders of state administrative agencies where timely and adequate state court review is available and the case presents “difficult questions of state law bearing on policy problems of substantial public import.” Brody found that under Burford, a federal court should abstain from hearing a case “if its adjudication in a federal forum would be disruptive of state efforts to establish a coherent policy with respect to a matter of substantial public concern.” But Brody found that the U.S. Supreme Court’s 1996 decision in Quackenbush v. Allstate Insurance Co. strictly limited the Burford doctrine. Quackenbush, Brody said, held that “when the remedy sought is legal rather than equitable, a district court may not abstain under Burford and remand the complaint to state court.” As a result, Brody found that her task was to determine if the suit sounded in law or equity. “No Supreme Court, 3rd Circuit, or Pennsylvania case squarely addresses whether an action commenced by Pennsylvania’s statutory liquidator to recover an alleged preferential payment constitutes an action at law or an action in equity,” Brody wrote. But Brody found guidance in a U.S. Supreme Court decision which held that an action by a trustee in bankruptcy to recover as a voidable preference a sum of money paid by the bankrupt to a creditor prior to bankruptcy, where no injunctive or equitable relief was sought, was an action at law. Although no Pennsylvania state cases address the issue, Brody found that “cases from other states interpreting their respective state law uniformly follow the doctrine of the Supreme Court.” Brody concluded that “the overwhelming authority instructs that a demand for a money judgment for a voidable preference is an action at law.” As a result, Brody concluded that “because this is an action at law, a remand is unavailable under Quackenbush. Therefore, the commissioner’s claim that Burford provides a basis for remand of the instant action fails.”

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