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First Dakota National Bank v. Bancinsure, Inc.

United States District Court, D. South Dakota

June 2, 2015



KAREN E. SCHREIER, District Judge.

John D. Doak, Insurance Commissioner of the State of Oklahoma, as Receiver of Red Rock Insurance Company, f/k/a BancInsure, Inc., [1] moves the court for an order abstaining from further proceedings and staying litigation in this matter until such time as liquidation proceedings in State of Oklahoma v. Red Rock Insurance Co., Case No. CJ-2014-4353 are completed. Plaintiff, First Dakota National Bank, opposes the motion. For the following reasons, the motion is granted.


First Dakota is a national bank with its principal place of business in Yankton County, South Dakota. BancInsure is an Oklahoma insurance company headquartered in Oklahoma City, Oklahoma. First Dakota purchased a financial institution bond from BancInsure to provide coverage for liability issues that could arise in the course of its operation.

In February 2004, First Dakota loaned businessman Terry Schulte $250, 000. Loan officer Wayne Wassink oversaw the Schulte loan. Wassink transacted business regarding the Schulte loan through Schulte's intermediary, Douglas Larsen. Over the next five years, the Schulte loan was reviewed annually and renewed.

In October 2009, Wassink met with Schulte because the Schulte loan was past due. Schulte told Wassink he did not have a line of credit with First Dakota and he suggested that Larsen must have forged the note. First Dakota conducted an investigation and notified BancInsure of the potential forgery on October 13, 2009.

In July 2011, First Dakota filed a proof of loss with BancInsure, seeking coverage under the bond for three loans, including the Schulte loan. In November 2011, BancInsure denied coverage on two of the three claims and stated that the information submitted regarding the Schulte loan was insufficient to prove coverage under the bond. In response, First Dakota agreed the other two loans were not covered, but maintained there was coverage for the Schulte loan under the bond. In March 2012, BancInsure again denied coverage for the Schulte loan and informed First Dakota its claim was barred because it had not brought suit within two years of when the loss was discovered, as required under the terms of the bond.

On April 5, 2012, First Dakota brought this action seeking a declaration of coverage under the bond, damages for bad-faith denial of the claim, and vexatious refusal to pay the claim. BancInsure moved for summary judgment alleging that the claim fell outside the two-year statute of limitations outlined in the bond. Docket 19. First Dakota moved to certify the question to the South Dakota Supreme Court of whether a financial institution bond is a surety contract.[2] This court granted the motion to certify a question on December 31, 2013. BancInsure's motion for summary judgment was subsequently dismissed without prejudice. Docket 42. On July 30, 2014, the South Dakota Supreme Court issued an opinion stating that the bond is not a surety contract. Docket 43.

On August 1, 2014, the Oklahoma District Court for the County of Oklahoma issued an order to show cause why BancInsure should not be placed in receivership. Docket 54-2. On August 21, 2014, the Oklahoma County Court issued a liquidation order placing BancInsure into receivership and imposing a 120-day stay on all claims to which BancInsure is a party. Docket 54-1 at 8 (state court order placing insurer into receivership and liquidation, appointing receiver, and for permanent injunction). The liquidation order further enjoined all creditors, claimants, and litigants from depleting BancInsure's assets and prosecuting any pending action involving BancInsure. Id. at 6. On February 6, 2015, BancInsure filed this motion to enjoin litigation until the completion of liquidation proceedings in the Oklahoma County Court. Docket 52.


In Colorado River Water Conservation District v. United States, 424 U.S. 800 (1976), the Supreme Court addressed abstention "principles... which govern in situations involving the contemporaneous exercise of concurrent jurisdictions, either by federal courts or by state and federal courts." Id. at 817. "These principles rest on considerations of [w]ise judicial administration, giving regard to conservation of judicial resources and comprehensive disposition of litigation.'" Id. (quoting Kerotest Mfg. Co. v. C-O-Two Fire Equip. Co., 342 U.S. 180, 183 (1952)). Although federal courts have a "virtually unflagging obligation... to exercise the jurisdiction given them, " exceptional circumstances permit a federal court to abstain from exercising jurisdiction when a concurrent state-court action is also pending. Id. at 817-18. Abstention may be appropriate when the exercise of federal review would be disruptive of state efforts to establish a coherent policy with respect to a matter of substantial public concern. See Burford v. Sun Oil Co., 319 U.S. 315, 332-33 (1943) (holding that federal judicial intervention would impermissibly disrupt state's elaborate review system for regulating oil fields). Federal courts may also exercise their discretion and abstain to avoid duplicative, "piecemeal" litigation of a matter more properly decided in a parallel state court proceeding. See Colo. River, 424 U.S. at 817-18. The Supreme Court has cautioned that "the various types of abstention are not rigid pigeonholes into which federal courts must try to fit cases." New Orleans Pub. Serv., Inc. v. Council of City of New Orleans, 491 U.S. 350, 359 (1989) (" NOPSI ") (quoting Pennzoil Co. v. Texaco, Inc., 481 U.S. 1, 11 n.9 (1987)). The Eighth Circuit has followed NOPSI and declined to "compartmentalize[]" the various doctrines of abstention, instead considering the principles of "federalism, comity, and judicial administration that may justify overriding the strong presumption in favor of exercising federal jurisdiction." Wolfson v. Mut. Benefit Life Ins. Co., 51 F.3d 141, 145 (8th Cir. 1995), abrogated on other grounds by Quackenbush v. Allstate Ins. Co., 517 U.S. 706, 711, 730 (1996).

In Wolfson, the Eighth Circuit provided guidance in cases involving policyholders, policy beneficiaries, and creditors against a now-insolvent insurer. Id. There, the Eighth Circuit first considered "whether the state court insolvency proceeding provides a mandatory special procedure to adjudicate claims against the insolvent and then distribute the insolvent's inadequate assets among the various classes of successful claimants." Id. If there is such a concurrent state procedure purporting to bind the federal court plaintiff, the Eighth Circuit has concluded that both the Burford and Colorado River doctrines apply in determining whether abstention is appropriate. See id.

The Wolfson analysis is appropriate here. Like in Wolfson, this is a claim by a policyholder against an insolvent insurer that was initiated in federal court prior to insolvency. Likewise, the Oklahoma County Court proceeding provides a mandatory special procedure to adjudicate claims. See Munich Am. Reins. Co. v. Crawford, 141 F.3d 585, 593 (5th Cir. 1998) ("Oklahoma has not only adopted a comprehensive scheme to oversee the liquidation of insolvent insurers, it has provided a particular... court to oversee liquidation proceedings.").

The question then becomes whether the principles laid out in Burford and Colorado River weigh in favor of abstention. See Wolfson, 51 F.3d at 145-46. Thus, the following factors should be evaluated to determine if abstention is appropriate: (1) whether the state court conducting the liquidation proceeding possesses jurisdiction over BancInsure's assets; (2) whether continued litigation in federal court would compromise the state liquidation proceedings; (3) whether the case will require resolving a federal statutory claim; (4) whether the case has progressed in the federal forum to the point that abstention would waste judicial resources; (5) whether abstention would support the strong federal policy of deferring to state ...

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