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Pending state court litigation over the validity of an insurance policy is no bar to a federal suit over the same policy if it raises distinct issues under ERISA that could not be litigated in the state court, a federal judge has ruled. In his 13-page opinion in Leonard v. Educators Mutual Life Insurance Co., Senior U.S. District Judge William H. Yohn Jr. rejected a defense motion asking that the case be dismissed under the Colorado River abstention doctrine after finding that the state and federal proceedings are not truly “parallel.” At issue in both suits is about $200,000 in unpaid medical bills and the validity of an employee health insurance policy. The litigation began in April 2004 when Educators Mutual Life filed a declaratory judgment suit in the Lancaster County Court of Common Pleas seeking a ruling that the policy it wrote for Harold Leonard and The Leonard Clinic of Chiropractic was null and void. In the suit, Educators said it had ceased paying medical bills for Harold and Diane Leonard because the clinic made misrepresentations in an October 1997 application to renew coverage. The suit alleges that the clinic had ceased operations, but said in its renewal application that it was “an active and ongoing business operation.” The Leonards and the clinic responded to the suit by filing a counterclaim alleging breach of contract and violations of the Employee Retirement Income Security Act and Pennsylvania’s Unfair Insurance Practices Act. Six months later, in December 2004, the Leonards filed suit in U.S. District Court alleging two ERISA claims. The first claim is identical to their ERISA claim in state court, but the second alleges a claim of breach of fiduciary duty under ERISA sections 1109 and 1132(a)(2). When Educators filed a motion to dismiss on Colorado River grounds, the Leonards responded by withdrawing their ERISA claim in state court in an effort to moot the motion. Now Yohn has ruled that both suits may go forward because one of the ERISA claims in the federal suit falls within the exclusive jurisdiction of the federal courts. Yohn found that, generally, a pending state court suit is no bar to a federal suit over the same issues, but that the U.S. Supreme Court recognized an exception to that general rule in its 1976 decision in Colorado River Water Conservation Dist. v. United States. Under the Colorado River abstention doctrine, Yohn said, a federal court may stay or dismiss a case for reasons of “wise judicial administration,” but must do so only where “exceptional” circumstances exist. The court’s first task, Yohn said, is to determine whether the proceedings are “truly parallel.” Cases are considered parallel, Yohn found, when they “involve the same parties and claims.” They “need not be identical in every respect,” Yohn said, but there must be “a substantial likelihood that the state litigation will dispose of all the claims presented in the federal case.” The Leonards’ lawyer, James H. Thomas of Blakinger Byler & Thomas in Lancaster, argued that the two cases are no longer parallel because they withdrew the ERISA claim in state court. Yohn found the issue was not so simple, and that a federal plaintiff cannot automatically defeat a Colorado River abstention motion by withdrawing one claim if there remains “a substantial likelihood that the state litigation will dispose of all the claims presented in the federal case.” “Here, even after plaintiffs withdrew their ERISA counterclaim in state court, the two cases appear substantially similar. Both proceedings involve the same parties and arise out of the same insurance policy,” Yohn wrote. “Further, Educators’ state declaratory judgment action, plaintiffs’ state counterclaims, and plaintiffs’ first ERISA claim will all turn on the validity of plaintiffs’ insurance policy,” Yohn wrote. But despite the similarities between the two suits, Yohn concluded that the cases are not parallel because plaintiffs’ federal suit includes a claim that falls within the exclusive jurisdiction of the federal courts. The federal suit alleges a claim of breach of fiduciary duty under ERISA sections 1109 and 1132(a)(2), Yohn noted, and “federal courts have exclusive jurisdiction over such claims.” Yohn found that three of the federal appellate courts — the 2nd, 7th and 9th Circuits — have held that courts may not abstain under Colorado River when one of the claims in the federal proceeding falls within exclusive federal jurisdiction. Although the 3rd Circuit has never squarely addresses the question, Yohn found that it has “suggested, in dicta, that it would come to a similar conclusion.” Yohn found that other courts and commentators have also rejected Colorado River abstention whenever a claim falls within exclusive federal jurisdiction. “If federal courts defer to state courts in cases involving exclusively federal claims, the federal courts may eventually have to decide the exclusively federal claims because the state courts have no jurisdiction to hear them. Such a result surely does not advance Colorado River’s goal of ‘wise judicial administration,’” Yohn wrote. But even if the two cases were truly parallel, Yohn said he would refuse to abstain because Educators’ lawyer, George C. Werner of Barley Snyder in Lancaster, failed to show any “exceptional” circumstances. Werner argued that the Colorado River abstention was designed to avoid “piecemeal litigation.” But Yohn found that wasn’t enough, and that “there must be a strongly articulated congressional policy against piecemeal litigation in the specific context of the case under review.” Werner insisted in his brief that ERISA “reflects just such a policy because it provides state courts with concurrent jurisdiction over certain claims arising under the statute.” Yohn disagreed, saying ERISA “certainly does not express a strong congressional policy against piecemeal adjudication,” and that Congress “must have contemplated the possibility of parallel ERISA litigation in state and federal court because while it gives state courts concurrent jurisdiction over some ERISA claims, it vests federal courts with exclusive jurisdiction over other claims arising under the statute.” And since Educators failed to show that the state court proceedings have progressed substantially further than the federal proceedings, Yohn found that “the mere fact that the state case was filed first does not weigh heavily in favor of Colorado River abstention.” Instead, Yohn said there were factors that “weigh strongly against abstention.” The U.S. Supreme Court, Yohn said, has emphasized that “the presence of federal-law issues must always be a major consideration weighing against abstention.” And since the Leonards’ federal complaint contains a claim that falls within the exclusive jurisdiction of the federal courts, Yohn found that “the state court proceedings could not adequately protect plaintiffs’ rights since the court cannot even hear one of plaintiffs’ claims.”

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