Suffolk Federal Credit Union v. Cumis Insurance Society, Inc.
Docket: No. 10-CV-1 (ADS)(ETB)
Court: District Court, E.D. New York; July 22, 2010; Federal District Court
Suffolk Federal Credit Union (Suffolk) initiated an insurance coverage action against Cumis Insurance Society, Inc. (Cumis), alleging breach of contract for Cumis's refusal to indemnify Suffolk for over $42 million in losses stemming from a fraud perpetrated by Suffolk’s loan servicer, CU National Mortgage, LLC (CU National). Prior to this lawsuit, Cumis filed a declaratory judgment action in Wisconsin against Suffolk and other credit unions, asserting it has no obligation to cover losses from CU National’s fraud. Cumis sought to dismiss or stay Suffolk's action based on the abstention doctrine from Colorado River Water Conservation District v. United States, but the court denied this motion.
Factual background reveals that in 2003, Suffolk engaged CU National to assist with its mortgage services, which included the sale of mortgage loans. CU National's controlling shareholder, Michael J. McGrath, Jr., later admitted to a conspiracy that involved selling mortgage loans to Fannie Mae without Suffolk's consent and falsifying records to conceal these transactions, resulting in substantial losses for Suffolk. In 2008, Suffolk procured a fidelity bond from Cumis to cover losses from forged mortgage documents and dishonest acts by employees, defined to include servicing contractors. After discovering the fraud in February 2009, Suffolk promptly notified Cumis of its losses, but Cumis claimed these losses were not covered by the bond.
In September 2009, a Tolling Agreement was established between Cumis and Suffolk, preventing any actions related to coverage claims until its expiration on December 31, 2009. Notably, at the time of the agreement, Suffolk was unaware it had been named as a defendant in Cumis's Wisconsin action.
On January 4, 2010, Suffolk initiated a lawsuit shortly after the expiration of a Tolling Agreement. On the same day, Cumis provided Suffolk with the complaint related to a Wisconsin action, which had been removed from state court to the U.S. District Court for the Western District of Wisconsin on December 17, 2009. Cumis subsequently filed a motion to remand the case back to Wisconsin state court on January 20, 2010. In response, Suffolk moved to dismiss the case, arguing that the service of the complaint was untimely and that the Wisconsin court lacked personal jurisdiction. By March 2010, the court remanded the case to state court as per a stipulation between the parties. Suffolk then renewed its motion to dismiss, which is now fully briefed in the Wisconsin state court.
The excerpt also outlines the legal standard for Colorado River Abstention, which is an exception to a federal court's obligation to exercise jurisdiction. Generally, the existence of a state court action does not prevent federal proceedings on the same matter. However, under exceptional circumstances, the federal court may abstain to conserve judicial resources if concurrent state court litigation can comprehensively resolve the issues. Before deciding on abstention, a court must determine if the state and federal cases are parallel, defined as having a main issue subject to pending litigation. If parallel, a six-factor test is applied to assess the appropriateness of abstention: jurisdiction over the res, convenience of the federal forum, avoidance of piecemeal litigation, the sequence of filings, the applicability of federal law, and the adequacy of state procedures to protect federal rights. No single factor is decisive, and the judgment must weigh both the need to exercise jurisdiction and the factors against it. The Supreme Court emphasizes that only strong justifications warrant dismissal, indicating that the inclination is to favor federal jurisdiction.
The case and the Wisconsin action are deemed parallel, centered on whether Cumis is obligated to indemnify Suffolk for its losses. Despite this parallelism, the analysis indicates that abstention is not warranted.
1. **Jurisdiction Over Property**: The case does not constitute an in rem action and lacks jurisdiction over property. The absence of a res supports the exercise of federal jurisdiction, opposing abstention.
2. **Convenience of the Federal Forum**: Suffolk, based in New York, incurred its losses there, with most witnesses and documents located in the state. Although Cumis is based in Wisconsin, it has engaged New York-based counsel, and Wisconsin has no significant connection to the case. This factor favors federal jurisdiction.
3. **Avoiding Piecemeal Litigation**: Six credit unions, including Suffolk, are defendants in the Wisconsin case, all alleging similar claims against Cumis. Cumis argues that proceeding with the federal case may lead to inconsistent outcomes, echoing concerns from previous cases about the implications of parallel litigation. However, the potential for inconsistent results does not outweigh the strong presumption against abstention. The risk of duplicative litigation is acknowledged but is not a decisive factor favoring dismissal.
Overall, while the potential for inconsistent adjudications is noted, the analysis concludes that abstention is not appropriate in this case.
The analysis considers the order of jurisdiction obtained, noting that while the Wisconsin state court action was filed first in August 2009, both cases remain in the discovery phase, making it unclear which is further along. The court emphasizes that the timing of filing should not be the sole measure for jurisdictional priorities, referencing established precedent that neutrality of this factor supports maintaining jurisdiction. Cumis's reliance on its earlier filing is deemed disingenuous, particularly since a Tolling Agreement with Suffolk temporarily halted further action on the claims until December 31, 2009. Consequently, the delay in commencing Suffolk's lawsuit after the expiration of the Tolling Agreement diminishes the significance of Cumis's earlier filing.
Regarding the applicable law, while Cumis asserts that state law governs the merits, the absence of federal issues does not necessitate dismissal unless the state law issues are complex or novel, which is not the case here. New York law is likely applicable due to Suffolk being based there, suggesting the court is better suited than a Wisconsin court to apply this law, weighing against abstention.
Suffolk argues that its rights may not be protected in the Wisconsin action due to concerns over personal jurisdiction and the pace of proceedings. However, the court refrains from making a determination on personal jurisdiction and finds no evidence of undue delay attributable to the Wisconsin court. The analysis concludes that only two of the six factors support abstention, and Cumis fails to demonstrate exceptional circumstances warranting the court's relinquishment of jurisdiction. Therefore, Cumis's motion to dismiss or stay the action based on the abstention doctrine is denied.
