No, No, No -- Federal Court Declines to Abstain from Mallela-Type Recovery Action

NO-FAULT – FEDERAL ABSTENTION DOCTRINE – MALLELA-TYPE RECOVERY CLAIM – FRAUDULENT INCORPORATION
State Farm Mut. Auto. Ins. Co. v. Schepp
(EDNY, decided 5/7/2008)

Under the federal doctrine of abstention, a federal court may refuse to hear a matter when it believes doing so would potentially intrude upon the powers of a state court. There are several, different abstention doctrines, each named after the federal court case from whence it came.

State Farm and Travelers brought Malella-type actions seeking recovery of over $7.2 million that defendants allegedly obtained from plaintiffs by fraudulently seeking and receiving "no-fault" insurance benefits for radiology services. The plaintiff insurers claimed that the defendants were fraudulently incorporated. State Farm and Travelers also sought a declaration that they were not obligated to pay defendants for fraudulently submitted claims that had not yet been paid.

The Schepp defendants made a motion for abstention on the principal grounds that this case involves a novel state-law issue and a parallel state-court proceeding between the parties was already pending. The Schepp defendants had previously brought a DJ action against State Farm, Travelers and 23 other insurers, which action was consolidated with three other state court actions.

In denying the motion for abstention, Senior US District Court Judge Frederic Block held:

(1) that Burford abstention was not appropriate because that doctrine prevents federal courts from interfering with the proceedings or orders of state administrative agencies, and this action does not relate to any administrative action undertaken by the State of New York, much less an order or proceeding of a state agency;

(2) that Brillhart/Wilton abstention was inapplicable because that doctrine only applies to declaratory judgment actions, and does not apply because State Farm and Travelers seek, in addition to declaratory relief, damages based on theories of fraud and unjust enrichment; and

(3) that Colorado River abstention was inapplicable because the consolidated state court action was not "parallel" with this federal court action and even if it were, only one (#5) of the five factors for this type of abstention (1. res or property must be at stake; 2. federal and state courthouses must be equally convenient; 3. avoiding piecemeal litigation; 4. priority of commencement and progress of the federal and state court cases; and 5. novelty or complexity of the state law issue) was present.