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In a setback for Pennsylvania Insurance Commissioner Diane M. Koken, a federal judge has ruled that a court battle over $150 million of unfunded pension benefits that stemmed from the collapse of Reliance Insurance Co. must be waged in U.S. district court because the dispute is governed by an ERISA provision that vests the federal courts with exclusive jurisdiction. In his 18-page opinion in Koken v. Pension Benefit Guaranty Corp., U.S. District Judge Eduardo C. Robreno rejected Koken’s argument that the dispute should be sent back to the Pennsylvania Commonwealth Court, where it was originally filed. In the suit, Koken’s lawyers — Jerome R. Richter, Alan C. Gershenson and Sheila E. Branyan of Blank Rome — contend that PBGC has improperly asserted liens against Reliance subsidiaries to satisfy Reliance’s pension obligations. The suit demands that the liens be voided. “If given effect, those claims and lien filings would enable the PBGC to gain a priority over Reliance’s policyholders, contrary to the Pennsylvania Insurance Department Act, which gives the PBGC, at best, a priority just below policyholders,” Koken’s lawyers argue. But PBGC’s lawyers argued that the liens are proper and that Koken’s challenge to the liens cannot be litigated in the Pennsylvania state courts because of the Employee Retirement Income Security Act. PBGC is a wholly owned U.S. government corporation that administers the pension plan termination insurance program. Modeled after the Federal Deposit Insurance Corp., it was established to prevent the personal tragedy suffered by workers whose vested benefits are not paid when pension plans are terminated. Under ERISA, the PBGC becomes the statutory trustee of any plan terminated without sufficient funds to pay guaranteed benefits. Robreno found that the dispute between Koken and PBGC “can fairly be characterized as one of claim priority.” Koken contends in the suit that, under Pennsylvania law, the PBGC’s claims are at best entitled to third-priority status and that PBGC’s act of perfecting liens on the assets of certain Reliance subsidiaries improperly elevated the PBGC’s claim status. But PBGC argues that federal law authorizes it to perfect and enforce liens on the assets of the Reliance subsidiaries, and the PBGC’s liens on those subsidiaries’ assets are not subject to the priority scheme outlined in Pennsylvania’s Insurance Department Act of 1921. In his opinion, Robreno focused only on where the suit should be litigated. Originally filed in the Pennsylvania Commonwealth Court, the suit was removed to federal court by PBGC. Koken’s lawyers then filed a motion seeking remand to Commonwealth Court. Robreno sided with PBGC, finding that the dispute is governed by Section 1303(f) of ERISA, which explicitly vests the federal courts with exclusive jurisdiction over pension fund termination disputes. Under Section 1303, Robreno found, “only a federal district court is an ‘appropriate court’ to adjudicate the Commissioner’s claim.” Koken’s lawyers argued that the case should be remanded to the Commonwealth Court because the McCarran-Ferguson Act requires remand, and that Robreno should abstain from hearing the case under the abstention doctrine outlined in Burford v. Sun Oil Co. They also argued that the Princess Lida doctrine, named for the U.S. Supreme Court’s 1939 decision in Princess Lida of Thurn and Taxis v. Thompson, also mandates remand because the state court has already asserted in rem jurisdiction over property that is the subject of the suit. Robreno rejected all three arguments. Although the McCarran-Ferguson Act prevents federal pre-emption of state laws that regulate insurance, Robreno found that it was “not relevant to the issue of the court’s jurisdiction.” Instead, he said, McCarran-Ferguson “is relevant, if at all, only to the merits of any … dispute that may arise from a clash between the federal priority statute and the Pennsylvania priority scheme.” A Burford abstention would be “inappropriate,” Robreno found, because it applies only where a “timely and adequate” state court review is available. “Here, the only ‘appropriate court’ that may adjudicate the issues presented in this case is a federal district court. Therefore, there is no timely and adequate state-court review available to the parties,” Robreno wrote. Finally, Robreno found that the Princess Lida doctrine does not apply “where a court’s declaration of the existence and amount of a claim against the debtor … in no way disturbs the possession of the liquidation court, in no way affects title to the property, and does not necessarily involve a determination of what priority the claim should have.” Koken’s suit, he said, seeks a declaration that the PBGC’s liens on the assets of certain subsidiaries of Reliance, an insolvent insurance company, are void. “The court’s resolution of this question does not interfere with the Commonwealth Court’s possession of Reliance’s assets,” Robreno found. Koken’s lawyers argued that the assets of Reliance’s subsidiaries could, at some point in the future, be sold for the benefit Reliance’s estate. But Robreno found that “at this juncture the assets of the subsidiaries are not necessarily part of Reliance’s estate.” If the assets of the subsidiaries are not part of Reliance’s estate, Robreno said, “then the PBGC’s liens on them, if valid, are not subject to Pennsylvania’s priority scheme.” But even if the PBGC’s liens are deemed assets of Reliance’s estate, Robreno found that “any declaration by this court that the PBGC’s liens are valid does not involve a determination of what priority the liens should have under Pennsylvania’s priority scheme.” Instead, Robreno said, the U.S. Supreme Court has instructed that “such a scenario would implicate the question whether the McCarran-Ferguson Act operates to save the state priority scheme from pre-emption by the federal priority statute.”

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