45 F.

3d 764

Fed. Sec. L. Rep. P 98,521

Charles N. RILEY; Thelma Levine; Dr. Donald I. Schiffman,
on behalf of themselves and all others similarly situated
v.
Ted D. SIMMONS; Henry E. Kates; John Lloyd Huck; Stephen
Carlotti; Fred E. Brown; Edward Merrick Bull; Raymond E.
Cartledge; James E. Ferland; Ellen V. Futter; Paul
Hardin; Peter Harris; The Estate of John Harrison Kreamer;
Rocco J. Marano; Josh Weston, Thelma Levine, and Donald I.
Schiffman, on behalf of the uncertified Class consisting of
all persons, except Defendants, who purchased or otherwise
beneficially acquired securities that were incorrectly and
misleadingly labelled or described as annuities from Mutual
Benefit Life Insurance Company during the period August 14,
1988 to July 15, 1991, Appellants.

No. 94-5055.
United States Court of Appeals,
Third Circuit.
Argued Aug. 8, 1994.
Decided Jan. 20, 1995.
Sur Petition for Rehearing March 16, 1995.
Kenneth A. Jacobsen, Ira Neil Richards (argued), Lisa J. Rodriguez, Lisa
Chanow Dykstra, Chimicles, Jacobsen & Tikellis, Haverford, PA and
Daniel W. Krasner, Peter C. Harrar, Wolf, Haldenstein, Adler, Freeman &
Herz, New York City, for appellants Thelma Levine and Dr. Donald I.
Schiffman.
Lawrence A. Blatte, Rosen & Reade, New York City, for appellant Dr.
Donald I. Schiffman.
Steven S. Radin, (argued) Joseph L. Buckley, Paul F. Doda, Sills,
Cummis, Zuckerman, Rading, Tischman, Epstein & Gross, P.A., Newark,
NJ, for appellees Ted D. Simmons, John Lloyd Huck, Stephen Carlotti,
Fred E. Brown, Edward Merrick Bull, Raymond E. Cartledge, James E.
Ferland, Ellen V. Futter, Paul Hardin, Peter Harris, The Estate of John

Harrison Kreamer, Rocco J. Marano and Josh Weston.

Bruce E. Baldinger, Somerville, NJ, for appellee Henry E. Kates.
Deborah T. Poritz, Atty. Gen., Sharon M. Hallanan, Deputy Atty. Gen.,
Trenton, NJ and Robert L. Ritter (argued) David M. Kohane, Cole,
Schotz, Meisel, Forman & Leonard, P.A., Hackensack, NJ, for
intervenor/appellees, Andrew J. Karpinski, Acting Com'r of Ins. of the
State of N.J. and Rehabilitator of Mutual Ben. Life Ins. Co. in
Rehabilitation.
Before HUTCHINSON and NYGAARD, Circuit Judges, and LUDWIG,
District Judge.*
OPINION OF THE COURT
HUTCHINSON, Circuit Judge.

Appellants, Thelma Levine ("Levine") and Donald Schiffman ("Schiffman")

(collectively "Plaintiffs"),1 appeal an order of the United States District Court
for the District of New Jersey dismissing their action without prejudice
following the court's decision to abstain from considering their federal
securities claims under Burford v. Sun Oil Co., 319 U.S. 315, 63 S.Ct. 1098, 87
L.Ed. 1424 (1943). Plaintiffs sought relief under the federal securities laws
alleging misrepresentations that induced them to purchase certain annuities
issued by Mutual Benefit Life Insurance Company ("Mutual Benefit" or the
"Company"), an insolvent insurance company now in rehabilitation
proceedings before the New Jersey Commissioner of Insurance (the
"Commissioner" or the "Rehabilitator"). The district court permitted the
intervention of the Commissioner for the limited purpose of filing a motion to
dismiss Plaintiffs' complaint or, in the alternative, to stay the action pending the
outcome of a separate state action commenced by the Commissioner in his role
as the Rehabilitator of Mutual Benefit. The district court thereafter concluded
that continuation of Plaintiffs' action at this time would conflict with the
ongoing state rehabilitation proceedings. It also concluded that Plaintiffs could
receive "timely and adequate state court review" of all their claims, including
the federal securities claims, because all of these claims were essentially
grounded in fraud. From these premises, the district court determined that
Burford abstention counseled against continuation of Plaintiffs' case at this time
and dismissed Plaintiffs' action without prejudice subject to possible
reconsideration following the completion of the Commissioner's rehabilitation
efforts, 839 F.Supp. 1113.

Because federal jurisdiction over one of the claims is exclusive and there is an
independent basis for federal jurisdiction over the remaining claims, all of
which may belong directly to the Plaintiffs, we hold that the district court erred
when it concluded that there is an opportunity for timely and adequate state
court review of Plaintiffs' federal securities claims. We will therefore reverse
the district court's order dismissing Plaintiffs' case without prejudice and
remand for further proceedings consistent with this opinion.2

I. Factual & Procedural History

A. General Background
3

Mutual Benefit was established in 1845. As of July 1991, it was one of the
country's largest life insurance companies, with approximately 700,000
policyholders and annuitants and assets approaching $14 billion.

Until the late 1970's Mutual Benefit was a relatively conservative institution,
known as "the Tiffany of the insurance industry." In the late 1970s, and early
1980s, however, Mutual Benefit, like other insurance companies, began to
expand its products beyond the traditional life insurance policy. It marketed and
sold a variety of annuity contracts, including premium deferred annuities,
flexible annuities and guaranteed investment contracts. It began to speculate in
high-risk ventures and to unduly concentrate its holdings in real estate.

This speculation and excessive investment in real estate eventually led credit
agencies to downgrade Mutual Benefit's credit rating. Thereafter, in the first
half of 1991, Mutual Benefit's customers withdrew $500 million from the
Company. These withdrawals were projected to reach $1 billion by the end of
the year.

B. New Jersey Rehabilitation Proceedings

6

On July 16, 1991, New Jersey's Attorney General, with the consent of Mutual
Benefit's Board of Directors, asked the Superior Court of New Jersey, Chancery
Division for Mercer County (the "state court") to place Mutual Benefit in
rehabilitation under the supervision of the Commissioner. The state court
granted the request, appointed the Commissioner Rehabilitator of Mutual
Benefit and vested him with all the powers available under New Jersey's
version of the Uniform Insurers Liquidation Act (the "UILA"), N.J.Stat.Ann.
Secs. 17B:32-1 to 17B:32-30 (West 1985) (repealed 1992). See In re
Rehabilitation of Mutual Benefit Life Ins. Co., No. C-91-00109, slip op. at 2
(N.J.Super.Ct.Ch.Div. July 16, 1991) (the "Rehabilitation Order").3

The Rehabilitation Order granted the Commissioner exclusive title, possession

to, and control over Mutual Benefit's assets. Id. at 4. It enjoined all persons
from interfering in any way with the Commissioner in the discharge of his
rehabilitation duties or in his possession of the property and assets of Mutual
Benefit, including any causes of action belonging to the Company. Specifically,
the Rehabilitation Order provides that:

8 officers, directors, policyholders, agents, and employees of Mutual Benefit and

All
all other persons or entities of any nature, including but not limited to claimants,
holders of annuity contracts, beneficiaries under any Mutual Benefit contract,
plaintiffs or petitioners in any action against Mutual Benefit ... having claims of any
nature against Mutual Benefit including crossclaims, counterclaims and third party
claims, are hereby enjoined and restrained from:
9* * * * * *
10

b. bringing, maintaining or further prosecuting any action at law, suit in equity,

special or other proceeding against Mutual Benefit, its estate in receivership or
against the Commissioner and his successors in office, as Rehabilitator thereof
...;

11

c. making or executing any levy upon the property or estate of Mutual Benefit;

******
12
13

e. interfering in any way with the Commissioner, or any successors in office, in

his possession of or title to the property and assets of Mutual Benefit, or in the
discharge of his duties as Rehabilitator thereof, pursuant to this Order. All
persons or entities of any nature other than the Rehabilitator, are hereby
restrained from commencing any direct or indirect actions against any reinsurer
of Mutual Benefit for proceeds of any reinsurance policies issued to ... or other
agreements with, Mutual Benefit.

14

Id. at 5-7. On August 7, 1991, the state court entered an order continuing the
Commissioner's appointment as Mutual Benefit's Rehabilitator. In re
Rehabilitation of Mutual Benefit Life Ins. Co., No. C-91-00109
(N.J.Super.Ct.Ch.Div. Aug. 7, 1991).

15

On March 20, 1992, the state court authorized the Commissioner to extend
Mutual Benefit's $20 million executive liability policy (the "D & O Policy").
Mutual Benefit paid a $1 million premium in order to extend this policy. As
partial consideration for this premium, the extended policy was construed to

cover actions brought by the Commissioner against the former directors and
officers of Mutual Benefit despite an exclusion in the original policy for actions
by one insured against other insureds. In re Rehabilitation of Mutual Benefit
Life Ins. Co., No. C-91-00109 (N.J.Super.Ct.Ch.Div. Mar. 20, 1992) (order
extending indemnification and reconsidering the decision denying extension of
insurance).
16

In late 1991, the Commissioner's financial analysis of Mutual Benefit showed

that, as of June 30, 1991, the Company's assets had a going concern value that
was only about 88% of its liabilities.4 The Commissioner's report estimated the
liquidation value of the Company, on a six month basis, at 55% of its liabilities.

17

On August 3, 1992, the Commissioner submitted a Plan of Rehabilitation to the

state court. This plan (the "Rehabilitation Plan") guarantees full death,
disability and retirement benefits and restructures permanent life policies and
other contracts into non-participating universal contracts with minimum
guaranteed interest rates. The Rehabilitation Plan also restricts withdrawals
during a rehabilitation period ending December 31, 1999. In re Rehabilitation
of Mutual Benefit Life Ins. Co., No. C-91-00109, slip op. at 23-28
(N.J.Super.Ct.Ch.Div. Aug. 12, 1993).

18

Under the Rehabilitation Plan, policyholders would recover 88% of the present
value of their July 1991 account balances. The Plan provides an alternative opt
out provision entitling policyholders to immediate payment of 55% of the value
of their original account.

19

The state court held hearings on the Rehabilitation Plan over a four month
period beginning in January 1993. The court's opinion, issued August 12, 1993,
affirms the Rehabilitation Plan in most respects. Appeals from that order have
been filed in state court.

20

During the rehabilitation process, the Commissioner investigated the causes of

Mutual Benefit's collapse. On July 8, 1993, the Commissioner filed a complaint
in the state court on behalf of "Mutual Benefit, its policyholders, creditors and
other interested parties" against thirty-eight named defendants, including many
of the officers and directors who managed the Company from 1979 through
1991, Appellants' Appendix ("App.") at 449, and the Company's outside
accountants, Ernst & Young. The complaint alleges theories of recovery based
on negligence, breach of fiduciary duty, fraud, waste and violations of New
Jersey's Consumer Fraud Act, N.J.Stat.Ann. Secs. 56:8-1 to 56:8-48 (West 1989
& Supp.1994). In the state court action, the Commissioner seeks to recover

damages for the benefit of Mutual Benefit's estate and "to recover, particularly
for the benefit of Mutual Benefit's policyholders who have priority in the
distribution of Mutual Benefit's assets, damages ... which have resulted in loss
to the Company and diminution in the value of the insurance policies and other
investments held by some 700,000 policyholders and annuitants." App. at 449.
21

The Commissioner's complaint alleges that the former directors and officers of
Mutual Benefit mismanaged the Company by investing too much of the
Company's assets in real estate, particularly high risk real estate projects, and by
investing in leveraged buy-outs. The complaint also alleges that the directors
and officers made material misrepresentations to Mutual Benefit's policyholders
and annuitants regarding the financial condition of the Company.

C. New Jersey State Class Actions

22

On July 17, 1991, one day after the state court placed Mutual Benefit in
rehabilitation, the first of six state class actions was filed. The other five class
actions were filed within the week, and the state court eventually consolidated
all six into one action.

23

The state class action complaints are similar to the Commissioner's complaint.
They allege excessive investment in high-risk, non-performing real estate
ventures and leveraged buy-outs, as well as public misrepresentations
concerning Mutual Benefit's financial condition. They assert claims for fraud,
negligent misrepresentation, breach of fiduciary duty, and negligence.

24

The various plaintiffs in the state class actions moved for class certification.
The Commissioner opposed class certification and sought dismissal of the
action on the ground that the Commissioner had standing to bring the claims
asserted therein and that continuation of the class action suits would impede the
rehabilitation effort.

25

The state court denied the plaintiffs' motion for class certification in the state
actions without prejudice holding that the Commissioner had a prior right to
pursue these claims and satisfy them out of the $20 million D & O Policy. The
state court stayed the class actions and ruled that after the Commissioner's
action was concluded, a Rehabilitation Plan approved, and all appeals
exhausted, it would decide whether plaintiffs had been made whole and
whether their actions should proceed as a class action, if at all. In re Mutual
Benefit Life Policyholders Action Litigation, No. L-91-5318, slip op. at 2
(N.J.Super.Ct. Jan. 5, 1993). The state court permitted discovery to proceed

only to the extent plaintiffs' efforts "[did] not require any input from the
rehabilitation estate and [did] not interfere with the prior orders of the Court in
the rehabilitation action." Id. at 3. In orders dated January 25, 1993, and June 8,
1993, respectively, the Superior Court of New Jersey, Appellate Division and
the New Jersey Supreme Court denied the plaintiffs' motions for leave to
appeal the lower court's decision.
D. The Present Case
26

On August 15, 1991, Plaintiffs 5 filed this federal class action suit on behalf of
themselves, and all others similarly situated, against a number of officers and
directors of Mutual Benefit in the district court. These same officers and
directors are the defendants in the Commissioner's state court suit, as well as
the state court class actions.

27

The Plaintiffs sought class certification on behalf of all purchasers of Mutual

Benefit annuities between August 14, 1988 and July 15, 1991. Approximately
200,000 individuals fall into this category. Plaintiffs' complaint alleges that the
various directors and officers joined as defendants: (1) violated sections 5 and
12(1) of the Securities Act of 1933 (the "Securities Act"), 15 U.S.C.A. Secs.
77e, 77l(1) (West 1981), by failing to register Mutual Benefit's annuity products
with the SEC as securities; (2) made materially false or misleading statements
in the prospectuses issued in connection with the annuities in violation of
section 12(2) of the Securities Act, 15 U.S.C.A. Sec. 77l(2) (West 1981); (3)
were liable as controlling persons of Mutual Benefit under section 15 of the
Securities Act, 15 U.S.C.A. Sec. 77o (West 1981); (4) made materially false
and misleading statements about the financial strength of Mutual Benefit
thereby inducing Plaintiffs to purchase the annuities in violation of section
10(b) of the Securities Exchange Act of 1934 (the "Securities Exchange Act"),
15 U.S.C.A. Sec. 78j(b) (West 1981); and (5) violated New Jersey Statutory
and common law, including the New Jersey Consumer Fraud Act, N.J.Stat.Ann.
Secs. 56:8-1 to 56:8-48 (West 1989 & Supp.1994). The Plaintiffs alleged that
Mutual Benefit compiled a real estate portfolio that lacked adequate
diversification; that Mutual Benefit's overall portfolio had a substantial
concentration in real estate; and that Mutual Benefit made improper
investments.

28

On August 6, 1993, the officers and directors named as defendants in this

action moved to dismiss the complaint because the district court did not have
subject matter jurisdiction, the Plaintiffs had failed to state a claim, and they
had failed to assert their fraud claims with the particularity required. The
officers and directors also moved to dismiss the complaint on the basis of the

Burford abstention doctrine or, alternatively, to stay the action until the
Commissioner's action is concluded. On August 20, 1993, the Commissioner
moved to intervene in this action, and to join the officers' and directors' motion
to dismiss Plaintiffs' complaint on abstention grounds or to enter a stay until the
conclusion of the state proceedings.
29

On December 13, 1993, the district court granted the Commissioner's motion to
intervene6 and dismissed the complaint, without prejudice on the basis of
Burford abstention. See Riley v. Simmons, 839 F.Supp. 1113 (D.N.J.1993).
This timely appeal followed.

II. Jurisdiction & Standard of Review

30

We review the district court's decision to abstain for abuse of discretion, but the
district court's analysis of the law on abstention is subject to de novo review.
Thus:

31 district court has little or no discretion to abstain in a case that does not meet
"A
traditional abstention requirements. Within these constraints, determination whether
the exceptional circumstances required for abstention exist is left to the district
court, and will be set aside on review only if the district court has abused its
discretion."
32

Grode v. Mutual Fire, Marine & Inland Ins. Co., 8 F.3d 953, 957-58 (3d
Cir.1993) (quoting United Serv. Auto Ass'n v. Muir, 792 F.2d 356, 361 (3d
Cir.1986), cert. denied, 479 U.S. 1031, 107 S.Ct. 875, 93 L.Ed.2d 830 (1987)).

33

The district court had subject matter jurisdiction pursuant to section 22 of the
Securities Act, 15 U.S.C.A. Sec. 77v(a), and section 27 of the Securities
Exchange Act, 15 U.S.C.A. Sec. 78aa. Section 27 grants the federal courts
"exclusive jurisdiction" over any violation arising under the Securities
Exchange Act. 15 U.S.C.A. Sec. 78aa. In the order which the Plaintiffs appeal
the district court said: "This Court will dismiss the action without prejudice as
Burford abstention is appropriate." Riley, 839 F.Supp. at 1129. This phrasing
raises a question concerning our appellate jurisdiction. We have a duty to
inquire independently into our own jurisdiction.

34

Under Borelli v. City of Reading, 532 F.2d 950, 951-52 (3d Cir.1976) (per
curiam), a district court order which dismisses a complaint without prejudice is
generally not considered a final appealable order. It is final and appealable,
however, if the plaintiff cannot amend the complaint to remove the ground of
dismissal. Borelli, 532 F.2d at 952 (citations omitted). The district court's

decision to abstain under Burford leaves the Plaintiffs unable to amend the
complaint to remove the reason for the district court's dismissal. Moreover, a
decision to abstain is necessarily "without prejudice" because it always prevents
the court from proceeding to the merits. Thus, Borelli does not apply to this
case.
35

In Baltimore Bank for Cooperatives v. Farmers Cheese Cooperative, 583 F.2d

104 (3d Cir.1978), we considered our appellate jurisdiction over a district court
order staying an action on the basis of Burford abstention. We noted first that
the proper disposition of a case to which Burford abstention applies is a "
'dismissal of the action, rather than retention of jurisdiction pending a state
determination....' " Id. at 108 (citing Charles Wright, Federal Courts Sec. 52, at
200 (1970)); see also Erwin Chemerinsky, Federal Jurisdiction Sec. 12.3, at 612
(1989) ("Burford abstention--abstention out of deference to centralized state
administrative proceedings--requires the federal court to dismiss the case.").
We then went on to state:

36 the technical failure to dismiss should not render an ordinarily final disposition
But
of the case on the basis of abstention unappealable. Drexler v. Southwest Dubois
School Corp., 504 F.2d 836, 838 (8th Cir.1974) (en banc). Such an abstention order
is for all intents and purposes a final disposition of the case within the meaning of
28 U.S.C. Sec. 1291 and is therefore appealable. Indiana State Employees Ass'n, Inc.
v. Boehning, 511 F.2d 834 (7th Cir.1975).
37

Id. at 108-09. We explained our Baltimore Bank holding on appellate

jurisdiction in Richman Brothers Records, Inc. v. U.S. Sprint Communications
Co., 953 F.2d 1431 (3d Cir.1991). There we stated:

38

The teachings of Farmers Cheese are two-fold: administrative abstention orders,

which completely relinquish federal jurisdiction by giving way to state
administrative agencies, are final decisions appealable under section 1291;
orders transferring discrete issues involving regulatory expertise under the
doctrine of primary jurisdiction, by giving way to a federal administrative
agency, are not final decisions appealable under section 1291.

39

Richman Bros. Records, Inc., 953 F.2d at 1442. We opined: "Generally, when a
federal court abstains in deference to a state court or regulatory agency, the
abstention necessarily ends the federal court's involvement with the suit." Id. at
1443; see also Chemerinsky, Sec. 12.3, at 612 ("The effect of Burford
abstention is thus not to postpone federal court review but to prevent it
entirely.").

40

Finally, in Carr v. American Red Cross, 17 F.3d 671, 678 (3d Cir.1994), we
held that, "where [a] dismissal of an appeal will have the practical effect of
denying later appellate review of a district court's underlying order, the
underlying order must be final, within the meaning of 28 U.S.C. Sec. 1291." In
this case, if we were to determine that we lacked appellate jurisdiction, we
would effectively render the district court's decision to abstain unreviewable.
Our rationale in Baltimore Bank, Richman Brothers Records, Inc., and Carr
demonstrates the finality of the district court's order. Accordingly we have
appellate jurisdiction over this case under 28 U.S.C.A. Sec. 1291 (West 1993).

III. Analysis
41

Federal courts have an obligation to exercise their jurisdiction. Abstention,

therefore, is the exception rather than the rule. See Hawaii Housing Auth. v.
Midkiff, 467 U.S. 229, 236, 104 S.Ct. 2321, 2326-27, 81 L.Ed.2d 186 (1984);
Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 817,
96 S.Ct. 1236, 1246, 47 L.Ed.2d 483 (1976). Moreover, Burford abstention has
particular relevance to claims arising in the course of state regulation of
insolvent insurance companies. See Grode, 8 F.3d at 958; Lac D'Amiante du
Quebec, Ltee. v. American Home Assurance Co., 864 F.2d 1033, 1045 (3d
Cir.1988) ("LAQ "); cf. University of Md. v. Peat Marwick Main & Co., 923
F.2d 265, 270-71 n. 6 (3d Cir.1991) (assuming for purposes of case that state
regulation of insurance companies can provide the relevant "complex
regulatory scheme" or "coherent policy with respect to a matter of substantial
public concern" that are Burford prerequisites). Recognizing these principles,
we examine the district court's decision to apply Burford abstention to
Plaintiffs' claims, including their federal securities claims, and to dismiss this
action.

42

The Supreme Court has summarized Burford's underlying principles as follows:

43
Where
timely and adequate state-court review is available, a federal court sitting in
equity must decline to interfere with the proceedings or orders of state administrative
agencies: (1) when there are "difficult questions of state law bearing on policy
problems of substantial public import whose importance transcends the result in the
case then at bar"; or (2) where the "exercise of federal review of the question in a
case and in similar cases would be disruptive of state efforts to establish a coherent
policy with respect to a matter of substantial public concern."
44

New Orleans Pub. Serv., Inc. v. Council of New Orleans, 491 U.S. 350, 361,
109 S.Ct. 2506, 2514-15, 105 L.Ed.2d 298 (1989) ("NOPSI ") (quoting
Colorado River Water Conservation Dist., 424 U.S. at 814, 96 S.Ct. at 1244-

45). The principles just quoted, however, fail to tell the whole story. In NOPSI,
the Supreme Court also teaches us that Burford abstention calls for a two-step
analysis. The first question is whether "timely and adequate state-court review"
is available. Id. Only if a district court determines that such review is available,
should it turn to the other issues and determine if the case before it involves
difficult questions of state law impacting on the state's public policy or whether
the district court's exercise of jurisdiction would have a disruptive effect on the
state's efforts to establish a coherent public policy on a matter of important state
concern.
45

In this case, the district court emphasized the disruptive effect that the
continuation of the federal action would have on the parallel state rehabilitation
proceedings. In considering whether Plaintiffs had an opportunity for "timely
and adequate state court review" of their federal securities claims, the district
court equated them with the common law fraud claims the Commissioner was
pursuing in his state action. It then reasoned: "This is not a case where
plaintiffs' federal claims give them an independent or separate remedy" and so
concluded that the state court action provided " 'timely and adequate' state court
review...." Riley, 839 F.Supp. at 1127.

46

Plaintiffs first contend that Burford abstention is available only in cases

invoking equitable remedies and that their request for class certification and a
declaratory judgment is not primarily addressed to what used to be the equity
side of the court. Plaintiffs also challenge the district court's legal premise
conflating the federal securities claims with the state common law fraud claims.
They argue that the district court erred in concluding that "timely and adequate
state court review" of their federal securities claims is available and,
accordingly, that the district court's order dismissing their action without
prejudice should be reversed. In the alternative, Plaintiffs argue that the district
court abused its discretion when it concluded that the continuation of the
federal securities action would exert a disruptive effect on the state
rehabilitation proceedings and interfere with the state's attempt to establish a
coherent policy relating to the regulation of insolvent insurance companies.

47

Preliminarily, we consider Plaintiffs' argument that the district court erred in

invoking Burford abstention in a case in which the primary remedy they seek is
money damages. We are referred again to NOPSI and our own decision in
University of Maryland. In NOPSI, the Supreme Court did indeed state that "a
federal court sitting in equity must decline to interfere with" state court
proceedings where Burford abstention requirements are met. See NOPSI, 491
U.S. at 361, 109 S.Ct. at 2514-15 (emphasis added). In Baltimore Bank, this
Court stated:

Burford, as we have already indicated, was an equitable action.... The instant

48
litigation to recover a debt is a legal action. Traditionally, abstention has been
applied only in cases involving equitable relief. The district court, however, ...
impermissibly extended abstention to a common law action.
49

Baltimore Bank, 583 F.2d at 111 (citation omitted). In University of Maryland,

we said that Baltimore Bank was still good law in this Circuit. University of
Maryland, 923 F.2d at 271.

50

Plaintiffs therefore argue that Burford abstention is inappropriate given this

Court's statements in University of Maryland and Baltimore Bank. The officers
and directors of Mutual Benefit, along with the Commissioner, contend that
Plaintiffs are really seeking rescission, an equitable remedy, and Burford
abstention is not precluded even if it remains available only in cases that stand
in equity.7

51

In this case, however, we believe the key to Burford abstention is whether the
Plaintiffs have an opportunity for "timely and adequate state court review" of
their claims. Where a state court lacks jurisdiction over a plaintiff's claim,
Burford abstention is clearly inappropriate because there can be no opportunity
for "timely and adequate state court review" of a claim that a court has no
power to decide. See University of Maryland, 923 F.2d at 274 (abstention is
inappropriate because it would deprive plaintiffs "of a forum and of all recourse
to have their claims heard on the merits").

52

Section 27 of the Securities Exchange Act gives federal district courts exclusive
jurisdiction over claims arising under that Act. See 15 U.S.C.A. Sec. 78aa.8 In
Evans v. Dale, 896 F.2d 975 (5th Cir.1990), the court of appeals reversed a
district court order, which dismissed on Burford principles, security claims
arising in the course of a domestic relations dispute. Evans brought a federal
suit, which was ancillary to her divorce action against her husband Dale,
seeking recovery under federal securities law for misrepresentations Dale had
made about corporate stock during a state court proceeding for division of
property. Evans, 896 F.2d at 976-77. The district court relied on Burford,
heavily emphasizing the reluctance of federal courts to intervene in issues of
state domestic relations law. The court of appeals held that abstention was
inappropriate because the plaintiff's federal securities claims were subject to
exclusive federal jurisdiction and so could not be considered in any state court.
Id. at 978-79; see also Finkielstain v. Seidel, 857 F.2d 893, 896 (2d Cir.1988)
(holding Burford abstention inapplicable to action seeking relief for alleged
violations of the Securities Exchange Act within the exclusive jurisdiction of
the federal courts).

53

The Securities Exchange Act gives federal courts exclusive jurisdiction over
Plaintiffs' Rule 10b-5 claim and necessarily deprives New Jersey state courts of
jurisdiction over that claim.9 Like the courts in Evans and Finkielstain, we will
reverse the district court's decision to abstain on Burford principles because
there is no possibility of "timely and adequate state court review" of Plaintiffs'
Rule 10b(5) claim, which Congress has chosen to commit exclusively to the
federal courts.10

54

The district court concluded that all of Plaintiffs' claims would receive "timely
and adequate state court review" because Plaintiffs' security claims were
essentially the equivalent of the common law fraud claims being pursued by
the Commissioner in the state court action. The district court stated: "No further
relief can be obtained by asserting the section 10(b)-5 claim vis-a-vis the
Rehabilitator's state court common law fraud claim." Riley, 839 F.Supp. at
1127.

55

It is clear, however, that Rule 10b-5 establishes a cause of action distinct from
one for common law fraud. See, e.g., Marcel Kahan, Games, Lies & Securities
Fraud, 67 N.Y.U.L.Rev. 750, 757, 760-61 (1992). Indeed, the legislative
history of the Securities Exchange Act and its text show that Congress
concluded that the common law remedies of deceit, fraud and
misrepresentation were inadequate and unfair to the average investor.
Consequently it made significant changes in the means by which liability for
those common law torts could be established. The district court's reliance on
the surface similarity of the Rule 10b-5 remedy to common law remedies for
fraud and misrepresentation highlights the district court's failure to consider all
of Plaintiffs' securities claims, particularly those based on sections 5 and 12(1)
of the Securities Act. Section 5 of the Securities Act requires a seller of
securities to file a registration statement before offering a security for sale
unless the securities offered come within statutorily defined exemptions. See 15
U.S.C.A. Sec. 77e. Section 12(1) provides that a purchaser of a security that is
not registered in accord with section 5 has a civil action for damages against the
seller of the security. Id. Sec. 77l(1). 11 This cause of action and the remedy it
affords are clearly different from common law actions.

56

In reaching its determination that Plaintiffs had an opportunity for "timely and
adequate state court review" of their claims, the district court may have also
conflated any injury the putative common law fraud of the officers and
directors caused the purchasers of the variable annuities with any injury that
fraud caused Mutual Benefit and all of its policyholders to suffer.12 We have
held that Burford abstention is inappropriate where a plaintiff asserts "claims
which are broader than, and different from, the Commissioner's...." General

Glass, 973 F.2d at 204. We have also acknowledged that individual

stockholders may have a distinct and independent cause of action from that of
the corporation or other stockholders premised on misrepresentations by
officers and directors of a corporation. Hayes v. Gross, 982 F.2d 104, 108 (3d
Cir.1992) ("[A]n individual stockholder may sue officers and directors based
on an injury distinct from the injury to the corporation and the indirect injury to
stockholders generally."). Plaintiffs' federal securities claims, like their common
law claims, arise out of the direct losses they suffered as a result of purchases of
annuities by Plaintiffs and other persons similarly situated to Plaintiffs. Their
claim is for losses they directly suffered, not as stockholders derivatively
injured by the directors' or officers' failure to meet their fiduciary duties to the
corporation. The district court erred when it concluded that Plaintiffs' federal
securities claims were the same as those being pursued by the Commissioner in
the state action.13 We hold that Plaintiffs' claims, if they turn out to be viable
federal securities claims, are distinct from those the Commissioner now presses
in the pending state action.14 Therefore, if the annuities Plaintiffs bought are
securities, they cannot receive timely and adequate state court review as
required by Burford.
57

We do not rely entirely on any general proposition that "[a]bstention is also

inappropriate ... [where] a federal issue is involved which [gives] the district
court independent federal jurisdiction." Grode, 8 F.3d at 960. Taken in its most
expansive sense, that proposition would preclude abstention no matter how
important the state interest or how severe the federal interference with the
state's scheme for resolution of problems Congress has seen fit to entrust to the
states. Nevertheless, the circumstances present in this case, in which the district
court may ultimately decide that the annuities Plaintiffs purchased are not
securities offered in violation of federal securities law, should lead the district
court to proceed cautiously.

58

We recognize the Commissioner's argument that Plaintiffs, by pursuing this

action, can put themselves in a position superior to Mutual Benefit's other
policyholders and claimants who are wholly dependent on the rehabilitation
proceedings. There is some force to the Commissioner's contention that
allowing this action to continue is likely to interfere with the process of
marshalling the assets of Mutual Benefit and equitably distributing them among
all persons who hold claims against the Company. In this respect, both the
Commissioner and the district court focus on the $20 million fund the D & O
Policy created. They contend that Plaintiffs' action may remove from Mutual
Benefit's estate funds needed for equitable apportionment among the claims
asserted in the state rehabilitation proceedings. The Commissioner asserts in his
brief: "Any judgment for [Plaintiffs] would wipe out the limits of the $20

million D & O Policy, and would leave the Commissioner without insurance
coverage for the claims of the other 500,000 policyholders not represented by
Plaintiffs' proposed class." Brief for Intervenor/Appellee at 37. He thus
concludes that Plaintiffs' ability to proceed in a federal forum promotes a race
to the courthouse that can detrimentally affect Mutual Benefit and its other
policyholders.
59

The officers and directors, as defendants, join this argument, adding their
voices to a chorus raising the inequity that may result from allowing Plaintiffs
to compete in a race for collection of the D & O Policy's limited fund after the
Commissioner has already spent $1 million of Mutual Benefit's dollars to
ensure that the proceeds of this policy would be available to its estate. Both the
Commissioner and the defendants also argue that continuation of this action, no
matter what its outcome, will diminish the funds available to Mutual Benefit
and its policyholders because the D & O Policy limits will be reduced under
policy provisions for their use in paying defendants' legal fees.

60

We, like the district court, are troubled by diversion of funds from Mutual
Benefit and its policyholders to the cost of litigation that benefits only one class
of persons injured by the acts of the Company's officers and directors. A
remedy for that problem, however, is beyond the power of this panel under
existing statutory law and what we believe is binding Supreme Court precedent
and circuit procedure. Governing case law seems to us to make it clear that
mere interference with the Commissioner's ability to marshall the Company's
assets cannot justify Burford abstention over claims exclusively subject to
federal jurisdiction.

61

Moreover, if the D & O Policy is an essential source of estate funds, this case
appears analogous to Hayes v. Gross, where this Court rejected a similar
argument when it was advanced by the Resolution Trust Company (the
"RTC"). In Hayes, the plaintiff was a purchaser of the stock of a failed savings
association and sought to recover damages from officers and directors of the
association for violations of the federal securities laws. Hayes, 982 F.2d at 105.
While the savings association was in receivership RTC asked to have the action
dismissed, arguing that the claim arose out of various officers' and directors'
mismanagement of the savings association, and that it was therefore a
derivative, as opposed to a direct claim. Id. RTC also argued that continuation
of the action would impair its ability to comply with its statutory mandate to
maximize the assets of the savings association. Id. at 109.

62

We considered whether the continuation of plaintiff's case affected RTC's

prosecution of a mismanagement suit on behalf of the savings association

against the officers and directors. We stated:

63
Allowing
plaintiff to pursue this claim will neither prejudice the corporation and its
other stockholders nor permit a double recovery for the same injury. If [the savings
association] has claims against its officers and directors arising from their
mismanagement, the RTC is free to pursue those claims for the ultimate benefit of
the creditors and stockholders of [the savings association]. Assuming solvency on
the part of the defendants, as we must on this record, we see no conflict between
plaintiff's interest and those of the creditors and other stockholders. Assuming
insolvency on the part of the defendants, a conflict between plaintiff and [the
savings association], as creditors of the defendants, may arise, but the RTC has
advanced no persuasive reason why, in such circumstances, plaintiff and [the
savings association] should not be treated as any other creditors competing for a
limited pool of resources.
64

As far as the potential for double recovery is concerned, plaintiff has alleged
that the market price of [the savings association's] stock when he purchased it
was far in excess of what it would have been had the market been evaluating
the failing institution that defendants knew [it] to be. Plaintiff will have to
prove this allegation. When he attempts to do so, it may be that he will attempt
to recover compensation to which the corporation is justly entitled. If so, the
district court will be required to evaluate the prospect of double recovery in the
specific fact context presented by plaintiff's case on damages. It will suffice for
present purposes to conclude, as we do, that double recovery is not inherent in
plaintiff's theory of the case and, accordingly, that recovery without duplication
is possible.

65

Id. at 108-09 (footnotes omitted) (emphasis added). Specifically, we also noted,

that "[i]f both plaintiff and the RTC prove[d] entitled to judgment, there
[would] be no inequity in requiring defendants to satisfy both judgments." Id. at
109.

66

The assumption of ultimate solvency may be quite optimistic, but in this case,
as in Hayes, we are constrained to act within the record and this record does not
show that the D & O Policy is essential to the rehabilitation of Mutual Benefit.
We see nothing on the face of this record that supports the Commissioner's
conclusion that the D & O Policy is the only asset available for satisfaction of a
judgment against the various officers and directors who are defendants.
Similarly, in University of Maryland, we rejected this argument when it was
advanced in support of Burford abstention. There, concluding that the
policyholders' claims were direct, as opposed to derivative, we held that
Burford abstention was inappropriate.

67

Hayes, and University of Maryland, compel this panel to hold that it is

inappropriate to dismiss a plaintiff's action solely because collection of a
judgment, if obtained, might reduce the assets of an insolvent insurance
company's estate.15 The Commissioner's argument may support a conclusion
that continuation of the federal action is likely to disrupt " 'state efforts to
establish a coherent policy with respect to a matter of substantial public
concern,' " but as we have stated throughout this opinion this is insufficient to
justify Burford abstention when there is no opportunity for "timely and
adequate state court review" of Plaintiffs' claims. NOPSI, 491 U.S. at 361, 109
S.Ct. at 2514 (quoting Colorado River Water Conservation Dist., 424 U.S. at
814, 96 S.Ct. at 1244-45).

68

Plaintiffs' claims in this case, like those in Hayes and University of Maryland,
appear to be direct claims for their own injuries. Their federal security claims
are substantially different than, and distinct from, the claims advanced by the
Commissioner in the state action. To the extent that Plaintiffs have asserted
valid securities claims,16 it seems clear to us that those claims are direct, rather
than derivative. As we have already noted, however, the problem created by the
lack of an opportunity for state court review would be eliminated if Plaintiffs'
annuities are not "securities" under federal law. Moreover, if Plaintiffs do
recover under the federal securities laws, they should no longer be entitled to
share in the funds of the Company, including any funds realized from the
Commissioner's action against the directors and officers in state court.
Therefore, as we noted in Hayes, it would be appropriate for the district court,
in determining damages, to adjust the Plaintiffs' remedy in this action to account
for any potential for double recovery in the state rehabilitation proceeding. See
Hayes, 982 F.2d at 109.

IV.
69

In conclusion, we hold that Burford abstention is precluded when a state court

has no jurisdiction over a plaintiff's direct as opposed to derivative claims.
When a plaintiff presses a direct claim within the jurisdiction of a federal court,
there is no basis for Burford abstention, if the plaintiff cannot receive timely or
adequate state court review of the claim. Here, it is clear that Plaintiffs' 10b-5
claim falls exclusively within the province of the federal courts. Moreover, as
to their claims under sections 5, 12(1), 12(2), and 15 of the Securities Act, it is
equally apparent that there is no opportunity for timely state court review, as
these claims are personal to the Plaintiffs. Because the district court erred when
it conflated Plaintiffs' federal securities claims with the common law fraud
claims of the Commissioner, and in concluding that Plaintiffs had an
opportunity for timely and adequate state court review of their claims, we will

reverse the district court's order dismissing Plaintiffs' claims under the Burford
abstention doctrine, and remand for further proceedings consistent with this
opinion.
70

NYGAARD, Circuit Judge, concurring.

71

I agree with the opinion of the court that the district court erred when it applied
Burford abstention. I also believe, alternatively, that Burford abstention is
simply not available when legal, rather than equitable or declaratory, relief is
sought.

72

In Baltimore Bank for Coops. v. Farmers Cheese Coop., 583 F.2d 104, 111 (3d
Cir.1978), a bank filed a diversity action seeking monetary recovery for milk it
had sold and delivered to the defendant. The district court abstained under
Burford, but we reversed, holding that Burford abstention is not available in
legal, common law actions. We stated:

73
Burford
... was an equitable action to restrain the Texas Railroad Commission. The
instant litigation to recover a debt is a legal action. Traditionally, abstention has been
applied only in cases involving equitable relief. The district court, however, ...
impermissibly extended abstention to a common law action.
74

Id.

75

A decade later, we broadened the scope of Burford abstention in Lac

D'Amiante du Quebec, Ltee. v. American Home Assur. Co., 864 F.2d 1033 (3d
Cir.1988). In that case, an asbestos manufacturer sued its insurer for a
declaratory judgment rather than money damages. The insurer, as here, was in
state rehabilitation proceedings. We noted that Burford relied on the traditional
discretion of a federal equity court to enforce or protect legal rights, stating the
issue as "whether Burford abstention is appropriate in a case ... where the court
is not being asked to provide equitable relief." Id. at 1044. We held that
abstention was available in the limited context of declaratory relief, opining:

76 central concern animating the Court's decision to abstain in Burford-[T]he

preventing the state regulatory scheme from needless disruption--simply does not
depend on whether the relief sought by the plaintiff is properly characterized as
legal or equitable. If the relief sought is legal and the disruption is of the extent and
character suggesting that Burford abstention is appropriate, a refusal to abstain
simply because the federal court is not sitting in equity makes no sense.
Id. Notwithstanding this broad dictum, however, we concluded "that Burford

77

Id. Notwithstanding this broad dictum, however, we concluded "that Burford

abstention is appropriate in cases seeking declaratory relief, even though such
relief does not fall within the traditional boundaries of equity jurisdiction." Id.
at 1045. In a footnote, we specifically noted that, because declaratory relief was
created by a 1934 act of Congress, it was not a common law action and our
holding did not conflict with Baltimore Bank. Id. at 1045 n. 14.

78

The next year, the Supreme Court decided New Orleans Pub. Serv., Inc. v.
Council of New Orleans ("NOPSI "), 491 U.S. 350, 109 S.Ct. 2506, 105
L.Ed.2d 298 (1989). Although the Court did not decide the issue of whether
Burford abstention is available in non-equitable actions, it did state in dictum
that "[w]here timely and adequate state-court review is available, a federal
court sitting in equity must decline to interfere with the proceedings or orders of
state administrative agencies...." Id. at 361, 109 S.Ct. at 2514 (emphasis
added). 1 Thus, while NOPSI is certainly not dispositive, it lends no support
whatsoever to the proposition that Burford abstention should be available in
cases where the relief sought is money damages.

79

We reviewed the issue of Burford abstention in legal actions in University of

Md. v. Peat Marwick Main & Co., 923 F.2d 265, 271-72 (3d Cir.1991). There,
a federal class action was filed against the independent auditors of a failed
insurer in rehabilitation proceedings. The suit alleged that the auditors had
made false and misleading statements about the insurer's financial condition, as
a result of which plaintiffs bought insurance policies that later turned out to be
no good. We relied on both NOPSI and Baltimore Bank and reiterated our
earlier holding that Burford abstention is simply not available in a case where
the plaintiff seeks only monetary damages. Id. at 271-72. We stated:

80 Supreme Court [in NOPSI ] stated, admittedly in dictum, that Burford

[T]he
abstention applies to a federal court sitting in equity. Without reading too much into
this dictum, we believe ... that NOPSI generally cautions lower federal courts not to
extend Burford abstention beyond proper bounds. Here, unlike Burford and the
other Supreme Court cases involving Burford doctrine, the action was at law, not in
equity, and sought monetary damages.
81

Id. at 271 (quotation marks and internal citations omitted). The opinion then
dealt with the insurance commissioner's argument that Lac D'Amiante had
eliminated the limitation of Burford abstention to equitable actions:

82 D'Amiante ], however, predated NOPSI, and the Supreme Court in NOPSI has
[Lac
given no indication that the distinction between legal and equitable relief has been
diluted. Furthermore, all that [Lac D'Amiante ] holds is that Burford may be
extended to cases seeking declaratory relief--which is in many ways similar to

injunctive relief--not that it may be extended to cases for monetary damages.... [Lac
D'Amiante ] did not alter the principle established in Baltimore Bank.8
83

Id. at 272 & n. 8 (citation omitted).

84

Thus, as of 1991, the law in this circuit was clear: Burford abstention was only
available where equitable or declaratory relief was sought. Abstention in legal
actions was barred by Baltimore Bank and University of Maryland.

85

In General Glass Indus. Corp. v. Monsour Medical Found., 973 F.2d 197 (3d
Cir.1992), however, a panel of this court reached the opposite conclusion.
Relying on what it perceived to be inconclusive authority, the General Glass
panel refused to rule out abstention merely because the relief sought consisted
of monetary damages. Id. at 202.

86

I think General Glass was incorrectly decided, containing two analytical errors.
First, the panel relied on the dictum in Lac D'Amiante which indicated that "the
distinction between legal and equitable relief is not dispositive in abstention
cases," id., but did not cite or discuss the clear holding of Baltimore Bank that
forbids abstention when money damages are sought.2 Second, it relied on
Tafflin v. Levitt, 493 U.S. 455, 110 S.Ct. 792, 107 L.Ed.2d 887 (1990), in
which the Supreme Court affirmed a district court judgment applying Burford
abstention in a RICO action seeking money damages. Notably, however, the
Court's grant of certiorari in that case was limited solely to whether state courts
have concurrent jurisdiction over RICO claims. Id. at 458, 110 S.Ct. at 794.
Tafflin therefore had no precedential value on the issue before the General
Glass panel. Thus, because the binding decisional law never was inconclusive
in the first place, the General Glass panel's reluctance to apply the clear
holdings of Baltimore Bank and University of Maryland was not justified.

87

In any event,

88
Internal
Operating Procedure 9.1 sets forth our judicial tradition that no panel of this
court may overrule the published holding of a previous panel. Only the in banc court
may do that. To the extent that the decision of a later panel conflicts with existing
circuit precedent, we are bound by the earlier, not the later, decision.
89

United States v. Monaco, 23 F.3d 793, 803 (3d Cir.1994). Accordingly,

because General Glass flatly conflicts with both Baltimore Bank and University
of Maryland, neither of which have been overruled, I am respectfully forced to
conclude that General Glass was wrongly decided and never was the law of this

circuit.
90

Applying Baltimore Bank and University of Maryland to this case, it is clear

that Burford abstention is not available. Although the complaint does plead
rescission, admittedly an equitable remedy, the plaintiffs have not sued the only
party capable of giving rescission: Mutual Benefit itself. Instead, they have
sued only the individual officers and directors, who, if found liable, can
respond only in damages. I take no delight in this conclusion. Although the
abstention doctrines have their root in equity cases, I am aware of no reason
why abstention should not equally be available where monetary damages are
sought. See Lac D'Amiante, 864 F.2d at 1044. As one leading treatise puts the
matter:Considerations of federalism are at the heart of abstention. These
considerations are too important to be made dependent on ancient distinctions
about the powers of the several courts at Westminster Hall, and the ability of a
federal court to defer to a state in a proper case ought not depend on whether
the case is thought of as "legal" or "equitable."

91

17A Charles A. Wright, et al., Federal Practice and Procedure Sec. 4241, at 1718 (1988).

92

Delightful or not, however, our circuit's law is clear, and until and unless the in
banc court or the Supreme Court overrules Baltimore Bank, we remain bound
by it.

93

PRESENT: SLOVITER, Chief Judge, BECKER, STAPLETON,

MANSMANN, GREENBERG, HUTCHINSON, SCIRICA, COWEN,
NYGAARD, ALITO, ROTH, LEWIS, McKEE and SAROKIN, Circuit Judges,
and LUDWIG, District Judge.*

SUR PETITION FOR REHEARING

March 16, 1995
94

The petition for rehearing filed by appellee Henry E. Kates in the above
captioned matter having been submitted to the judges who participated in the
decision of this court and to all the other available circuit judges of the circuit
in regular active service, and no judge who concurred in the decision having
asked for rehearing, and a majority of the circuit judges of the circuit in regular
active service not having voted for rehearing by the court in banc, the petition
for rehearing is denied.

95

PRESENT: SLOVITER, Chief Judge, BECKER, STAPLETON,

95

PRESENT: SLOVITER, Chief Judge, BECKER, STAPLETON,

MANSMANN, GREENBERG, HUTCHINSON, SCIRICA, COWEN,
NYGAARD, ALITO, ROTH, LEWIS, McKEE and SAROKIN, Circuit Judges,
and LUDWIG, District Judge.*

SUR PETITION FOR REHEARING

March 16, 1995
96

The petition for rehearing filed by appellees Ted D. Simmons, John Lloyd
Huck, Stephen Carlotti, Fred E. Brown, Edward Merrick Bull, Raymond E.
Cartledge, James E. Ferland, Ellen V. Futter, Paul Hardin, Peter Harris, the
Estate of John Harrison Kreamer, Rocco J. Marano and Josh Weston in the
above captioned matter having been submitted to the judges who participated in
the decision of this court and to all the other available circuit judges of the
circuit in regular active service, and no judge who concurred in the decision
having asked for rehearing, and a majority of the circuit judges of the circuit in
regular active service not having voted for rehearing by the court in banc, the
petition for rehearing is denied.

Hon. Edmund v. Ludwig, United States District Judge for the Eastern District
of Pennsylvania, sitting by designation

Plaintiffs are the class representatives for a class consisting of all persons,
except for the former officers and directors of Mutual Benefit Life Insurance
Company ("Mutual Benefit" or the "Company"), who purchased certain
annuities, which the class alleges were in fact securities subject to the federal
securities laws, from Mutual Benefit

Judge Ludwig concurs in the result

In 1992, while Mutual Benefit's Rehabilitation was ongoing, the New Jersey
Legislature repealed the UILA and enacted the Life & Health Insurers
Rehabilitation & Liquidation Act (the "RLA"), N.J.Stat.Ann. Secs. 17B:32-31
to 17B:32-91 (West Supp.1994). The RLA's purpose is "the protection of the
interests of insureds, claimants, creditors and the public generally" by clarifying
the law, equitably apportioning any unavoidable losses, and providing a
comprehensive rehabilitation and liquidation scheme. N.J.Stat.Ann. Sec.
17B:32-31(b) (West Supp.1994). The Legislature expressly made the RLA
applicable to pending rehabilitation proceedings. N.J.Stat.Ann. Sec. 17B:32-37

The Commissioner's report indicated that Mutual Benefit then had liabilities of

$9.9 billion and $8.8 billion in assets. His valuation of Mutual Benefit's assets
assumed that it would remain a going concern and would hold its assets for an
average of five to ten years
5

The record shows that Levine and Charles Riley initially filed this suit.
Schiffman subsequently filed a suit which the district court consolidated with
the Levine/Riley suit. Riley is not named as a plaintiff in the amended
complaint filed after consolidation of the two cases

Plaintiffs appeal only the district court's decision to abstain, not its decision to
permit the Commissioner to intervene in the federal court action

Although this panel is bound by the earlier holdings of this Court under Internal
Operating Procedure 9.1, see Hammond v. Commonwealth Mortgage Corp. of
Am., 27 F.3d 52, 57 (3d Cir.1994) (In re Hammond ), the comments in this
footnote relating to Burford abstention in nonequity cases are the opinion of the
opinion writer, not the Court. For a contrary view, see Nygaard, J., concurring.
In my opinion, it is not at all clear whether the statement in Baltimore Bank
restricting Burford abstention to equity is a holding that survives as the law
relating to Burford abstention has developed or that the Supreme Court's
reference in NOPSI to equity and our reference to it in University of Maryland
and Baltimore Bank are anything but dicta. Furthermore, substantial confusion
continues as to when an action brought under the federal system's unification of
law and equity is primarily equitable. Considering these uncertainties, I would
be inclined to follow the lead of another panel of this Court faced with the same
issue. It decided:
Decisional authority remains inconclusive as to whether Burford abstention
may be ordered only in cases of an equitable nature, or whether, as [we stated in
LAQ ], the distinction between legal and equitable relief is not dispositive in
abstention cases. Hence, we are hesitant to sustain [a] claim that the district
court's abstention order should be reversed, relying solely on the ground that
[Plaintiffs'] seek[ ] money damages, rather than either declaratory or injunctive
relief.
General Glass Indus. Corp. v. Monsour Medical Found., 973 F.2d 197, 202 (3d
Cir.1992) (emphasis added). The Baltimore Bank issue concerning Burford's
restriction to suits in equity was not initially addressed by the parties, but the
Court asked for and received supplemental briefing on it. This strengthens my
reluctance to decide the case on the ground that Burford abstention is limited to
cases primarily equitable in nature. My conclusion that Burford abstention does
not apply to this case for other reasons makes it unnecessary for me to delve
into issues involving arcane distinctions between law and equity and their

continuing relevance to abstention doctrine. I note, however, that section 12(1)

or section 12(2) claims under the Securities Act may be brought in either law or
equity. See Thomas Lee Hazen, The Law of Securities Regulation Secs. 7.2,
7.5, at 276, 301 (2d ed.1990); see also infra note 11 (discussing rescissionary
nature of section 12 of the Security Act).
8

Section 27 provides:
The district courts of the United States ... shall have exclusive jurisdiction of
violations of this chapter or the rules and regulations thereunder, and of all suits
in equity and actions at law brought to enforce any liability of duty created by
this chapter or the rules and regulations thereunder.
15 U.S.C.A. Sec. 78aa (emphasis added).

Rule 10b-5 implements section 10(b) of the Securities Exchange Act. It

provides:
It shall be unlawful for any person, directly or indirectly, by the use of any
means or instrumentality of interstate commerce, or of the mails or of any
facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material
fact necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or
would operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.

17

C.F.R. Sec. 240.10b-5 (1993)

10

Considering the impact such actions may have on procedures for the
rehabilitation or orderly liquidation of insolvent insurance companies, which
Congress has entrusted exclusively to the states, see 15 U.S.C.A. Secs. 1011,
1012 (West 1976), and the crushing impact that an insurance company's
inability to pay the claims of its insureds and other creditors may have, one
could wonder about the wisdom of this doctrine, but we believe it is beyond
this panel's power to change it

11

Section 12(1) is essentially a rescissionary remedy. It provides that the person

who sells the security is liable to the purchaser for:

the consideration paid for such security with interest thereon, less the amount
of any income received thereon, upon the tender of such security, or for
damages if he no longer owns the security.
15 U.S.C.A. Sec. 77l(1). Similarly, Plaintiffs' remedy under section 12(2) of the
Securities Act is essentially a remedy of rescission. 15 U.S.C.A. Sec. 77l(2).
That section provides a remedy for material misstatements or omissions made
in connection with the sale or offer for sale of a security.
12

We use the subjunctive "may have" because any difference between the injury
the purchasers of these annuities suffered and the injuries the company or its
policyholders face depends on whether the annuities are securities subject to
federal securities law or a type of insurance policy subject to state insurance
law. That question, which involves the merits of the Plaintiffs' federal and state
claims, is yet to be answered. If it is answered in the negative, there would then
appear to be an adequate opportunity for review of the remaining common law
claims in the courts of New Jersey, in which case the district court would have
to consider whether it should decline to exercise supplemental jurisdiction
pursuant to 28 U.S.C.A. Sec. 1367(c)(3) over the Plaintiffs' common law claims

13

Similar analysis might demonstrate that Plaintiffs' fraud claims under both New
Jersey common law and the New Jersey Consumer Fraud Act are personal to
Plaintiffs. Thus, on remand if the federal claims survive on the merits, the
district court may also have to determine whether Plaintiffs' state law cause of
action for fraud encompasses an injury distinct from any injury suffered by
Mutual Benefit

14

The district court's opinion indicates that the Commissioner was permitted to
intervene for the limited purpose of arguing in favor of Burford abstention. A
closer look at its opinion, however, indicates it also concluded that the
Commissioner would have standing to prosecute the Plaintiffs' federal securities
claims under New Jersey law. See Riley, 839 F.Supp. at 1127. In reaching this
conclusion, the district court relied on N.J.Stat.Ann. Sec. 17B:32-50(a)(15) and
In re Integrity Insurance Co., 240 N.J.Super. 480, 573 A.2d 928 (A.D.1990).
The parties have not argued the propriety of the district court's intervention
decision on this appeal and therefore we are unwilling to consider that issue.
We note, however, statements in In re Integrity Insurance Co. indicating that
the Commissioner only has standing to pursue derivative, as opposed to direct,
claims of creditors and policyholders. See In re Integrity Insurance Co., 573
A.2d at 935 (distinguishing between claims "on behalf of" creditors and
policyholders and claims "belonging to" creditors and policyholders). As

explained, Plaintiffs' claims seem to be direct claims that are personal in nature
at least to the extent that they seek damages under the federal securities laws
Section 17B:32-50(a)(15) gives the Commissioner the power to prosecute
actions on "behalf of" policyholders as opposed to those "belonging to"
policyholders. N.J.Stat.Ann. Sec. 17B:32-50(a)(15) (West Supp.1994). The
statute expressly gives the Commissioner standing to pursue such actions when
he acts in liquidation proceedings. It does not mention rehabilitation
proceedings. Compare N.J.Stat.Ann. Secs. 17B:32-41, 17B:32-42 (providing
grounds under which Commissioner may petition state court to place insurance
company in rehabilitation proceedings) and id. Sec. 17B:32-42 (providing that
Commissioner shall be appointed rehabilitator and outlining responsibilities of
Commissioner in rehabilitation capacity) with id. Secs. 17B:32-45, 17B:32-50
(providing grounds under which Commissioner may petition state court to
place insurance company in liquidation).
15

This principle was acknowledged by The United States Court of Appeals for
the Fifth Circuit in rejecting the application of Burford abstention to plaintiff's
claims in Evans v. Dale:
By deciding the federal securities fraud issues asserted here, the district court
will not usurp any part of Texas domestic relations law. It is true that the
outcome of the exclusively federal issue may affect the relative value of
property distributions which will be made by the Texas court and may even
require a redistribution of that property. However, the decision regarding
distribution or redistribution under Texas domestic relations law will remain
entirely within the authority of the Texas court. If the district court orders
disgorgement of the profits made by Dale in stock transactions subsequent to
the divorce or takes other remedial action allowed by the federal securities
laws, it will do so under its exclusive jurisdiction vested pursuant to those laws.
Evans, 896 F.2d at 979.

16

As we have previously noted, the district court did not reach the merits of
Plaintiffs' securities claims, nor do we. See supra notes 12 and 13

Based on this dictum, the Court of Appeals for the First Circuit has held that
post-NOPSI Burford abstention is very narrow and is not available in legal
actions. See Fragoso v. Lopez, 991 F.2d 878, 882 (1st Cir.1993)

Indeed, under our Internal Operating Procedures, the [Lac D'Amiante ] panel
could not have overruled the holding of a prior published opinion in this Circuit

The opinion did mention University of Maryland, but only in a "but see"

citation, without any analysis, in which it opined that the University of

Maryland court only "intimat[ed]" that Burford abstention is unavailable in
legal actions. Id
*

Lechner, Circuit Judge, was limited to voting for panel rehearing