BMO Harris Bank NA v. Old Republic Insurance Company et al

Filing 61

ORDER signed by Judge J.P. Stadtmueller on 9/27/2018. 49 Defendant Old Republic Insurance Company's Motion to Supplement the Record is GRANTED. 15 Defendant Old Republic Insurance Company's Motion to Dismiss is DENIED without prejudice. 40 , 46 , 50 and 55 Parties' Motions to Seal/Restrict Documents are GRANTED. CASE STAYED until further order of the Court. See Order for further details. (cc: all counsel)(jm)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WISCONSIN
FEDERAL DEPOSIT INSURANCE
CORPORATION,
Plaintiff,

Case No. 17-CV-734-JPS-JPS

v.
OLD REPUBLIC INSURANCE
COMPANY,

ORDER

Defendant.
BMO HARRIS BANK NA,
Plaintiff,
v.
OLD REPUBLIC INSURANCE
COMPANY and FEDERAL DEPOSIT
INSURANCE CORPORATION,

Case No. 17-CV-737-JPS-JPS

ORDER

Defendants.
BMO HARRIS BANK NA,
Plaintiff,
v.
OLD REPUBLIC INSURANCE
COMPANY and FEDERAL DEPOSIT
INSURANCE CORPORATION,
Defendants.

Case No. 17-CV-772-JPS-JPS

ORDER

1.

INTRODUCTION
The nearly decade-old dispute that underlies these cases involves the

denial of insurance claims made following defaults on approximately two
thousand home equity loans and lines of credit that BMO Harris NA
(“BMO”) and Guaranty Bank (now the Federal Deposit Insurance
Company (“FDIC”)) contend are covered under mortgage guaranty
insurance policies issued by Old Republic Insurance Company (“Old
Republic”). Case Number 17-CV-734 (the ‘734 case) and Case Number 17CV-737 (the ‘737 case) were originally filed in Milwaukee County Circuit
Court in 2009 and were consolidated by the circuit court for purposes of
case management and discovery-related issues. The third companion case,
Case Number 17-CV-772 (the ‘772 case), was originally filed in Milwaukee
County Circuit Court in March 2017.
In May 2017, the FDIC was appointed as receiver for Guaranty Bank.
On May 25, 2017, the FDIC removed the ’734 and ‘737 cases to this Court,
and on June 1, 2017 it removed the ‘772 case. The Court granted two
motions to stay filed by the FDIC, the second of which ended on February
5, 2018.
A barrage of motion practice ensued. The parties bicker about the
propriety of proceeding on an abridged state court record, seek to revisit
many issues already decided while the cases were pending in state court,
and, in the ‘772 case, disagree about whether the case should have been filed
in the first place. Having reviewed the parties’ pending motions, as well as
their other submissions detailing their efforts toward resolution, several
things are clear.
First, the motion filed by Old Republic to vacate certain rulings from
the state court proceedings must be addressed first, as its resolution will
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significantly affect the scope of the remaining litigation. The Court
addresses that motion below.
Second, two of the pending actions, the ‘737 and ‘772 case, appear to
suffer from a possible jurisdictional defect. As explained further below, the
“state-law exception” to the subject-matter jurisdiction conferred by the
Financial Institutions Reform Recovery and Enforcement Act of 1989
(“FIRREA”) might preclude this Court’s ability to hear these cases. 12 U.S.C.
§ 1819(b)(2)(D). Until that issue is resolved, further action by this Court on
those cases would be imprudent.
Third, even apart from the jurisdictional issue in two of these cases,
the issues animating all three cases exclusively involve matters of state law
and state procedure, and the Court is reluctant to wade unnecessarily into
Wisconsin law if the parties are approaching a resolution that would
eliminate the FDIC’s interests in these cases. The Court will address at this
juncture only the motions necessary to move the cases forward, and
encourages the parties to alert the Court immediately of any resolution they
reach in these cases.
Therefore, for the reasons explained below, and in the interest of
judicial economy, the Court finds it prudent to grant the FDIC’s motion to
file an abridged state court record, grant Old Republic’s motions to vacate
in the ‘734 and ‘737 cases, deny without prejudice Old Republic’s motion to
dismiss in the ‘772 case, and stay the ’772 case.
2. DISCUSSION
2.1

Abridged State Court Record

Pursuant to 28 U.S.C. § 1446(a), a party who removes an action to
federal court must file, along with its notice of removal, “a copy of all
process, pleadings, and orders” that were filed in the state court action. The
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FDIC did not file the entire state court record for the ‘734 and ‘737 cases
upon removal. Instead, the FDIC filed (in each case) a motion for leave to
file an abridged state court record, along with an addendum containing
what it believes are the essential papers from the state court actions. (Case
No. 17-CV-734, Docket #5; Case No. 17-CV-737, Docket #6). The complete
state court records are incredibly voluminous, totaling hundreds of filings
and docket entries and tens of thousands of pages.
Old Republic responded, stating its preference that the entire record
be filed in each case, but requesting in the alternative permission to
supplement the abridged record as necessary. (Case No. 17-CV-734, Docket
#8; Case No. 17-CV-737, Docket #10). Since then, Old Republic filed three
motions to supplement the state court record in the ‘734 case, four such
motions in the ‘737 case, and one the ‘772 case. (Case No. 17-CV-734, Docket
#21, #51, and #69; Case No. 17-CV-737, Docket #23, #31, #62, #79; Case No.
17-CV-772, Docket #49). Old Republic included with each motion a chart
that details the state court filings it believes must be added to the federal
court docket.
While proceeding on abridged records is certainly not the Court’s
preferred method, the Court is also mindful of the age and complexity of
these cases and recognizes that not all of the state court filings will be
relevant to the disposition of the remaining issues in these cases. The Court
will, therefore, grant the FDIC’s motions to file an abridged record and will
also grant all of Old Republic’s motions to supplement the record. The
Court expects the parties to continue to supplement the record with any
filings cited in their moving papers that are not already part of the record
in this Court.

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2.2

Motions to Vacate

The first of several motions filed in these cases seeking review or
reconsideration is Old Republic’s motion to vacate certain rulings made by
the special master/referee (“special master”) who was recruited to assist the
state trial judge with pretrial matters. (Case No. 17-CV-734, Docket #17).1
Specifically, Old Republic contends that the cases were referred to the
special master in violation of the Wisconsin constitution. It asks the Court
to vacate any rulings on dispositive motions decided by the special master
and any other special master rulings to which Old Republic filed an
objection, or an “exception” as it is known in Wisconsin procedure.
In 2010, the circuit court judge then presiding over the consolidated
cases, Judge John DiMotto, appointed retired Chief Judge Michael J.
Skwierawski as special master pursuant to Wisconsin Statutes section
805.06 for the purpose of “assisting the Court in coordinating pretrial
matters and conducting and completing discovery in an orderly and
efficient manner[.]” (Case No. 17-CV-734, Docket #2). The appointment
order, or “reference order,” gave the special master the “full authority of
the Court” to “coordinat[e] and establish[] all pretrial procedures” and to
“hear and decide . . . any other matters assigned to him by the Court
including all pre-trial motions arising in this case which are . . . assigned to
the [special master].” Id. at 2. The order also gave the special master “the
duty and power to regulate and control all discovery matters and any
discovery disputes[.]” Id. Exceptions to any decision made by the special

Old Republic filed substantively identical motions to vacate in the ‘734
case, (Docket #17), and the ‘737 case, (Docket #19). For the sake of brevity, the
Court will cite only to the docket entries in the ‘734 case. The Court’s ruling will
apply to all such motions.
1

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master were to be presented to the circuit court, which would then review
the filings submitted to the special master and would modify or set aside
the special master’s ruling only if it was “based on an erroneous exercise of
discretion.” Id. at 4. The only specific mention of dispositive motions in the
reference order is as follows: “In the event any party objects to the
scheduling of a motion for summary judgment or other dispositive motion
on grounds that discovery necessary to the issues raised by the motion is
not completed, such motion for rescheduling shall be heard and decided by
the [special master].” Id. at 3.
On March 29, 2017, just two months before these cases were removed
to this Court, the Wisconsin Supreme Court issued its decision in State ex
rel. Universal Processing Services of Wisconsin, LLC v. Circuit Court of
Milwaukee County, 892 N.W.2d 267 (Wis. 2017), holding that a reference
order similar to the one entered by Judge DiMotto in this case violated the
Wisconsin constitution. The court held that while circuit courts are
undoubtedly empowered to appoint a referee to assist with certain
functions of the judicial process, the Wisconsin constitution prohibits a
circuit court from delegating the “judicial power” to a referee. Id. at 285.
The core judicial powers that cannot be delegated include, for example,
conducting trials, deciding dispositive motions, and determining
fundamental rights. Id. The order at issue in Universal Processing
impermissibly delegated the judicial power because it “enable[d] the
referee to hear and decide all motions filed, whether discovery or
dispositive, subject to review under the standard of erroneous exercise of
discretion.” Id.
The court further held that the reference order’s erroneous exercise
of discretion standard of review violated the Wisconsin constitution’s
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provision of appellate authority. Id. at 286–87. The state legislature has not
granted the circuit courts appellate jurisdiction over rulings by referees. Id.
By utilizing what was in effect an “abuse of discretion” standard, the
reference order impermissibly placed the circuit court in an appellate role.
Id. The court rejected the argument that the constitutional infirmity was
“cured” because the referee’s decisions were actually reviewed de novo by
the circuit judge, stating that regardless of the standard applied, the nature
of the reference order itself was subject to scrutiny. Id. at 285–86.
In light of its holding, the court vacated all rulings by the special
master on dispositive motions and any ruling of the special master relating
to discovery to which either party had filed an objection. Id. at 291. Any
discovery ruling of the special master to which the parties agreed to abide
was left in effect. Id.
Old Republic contends that the reference order in these consolidated
cases is materially identical to the reference order in Universal Processing
and therefore also violates the Wisconsin constitution. For its remedy, Old
Republic seeks vacatur of: (1) each ruling of the special master on a
discovery dispute as to which Old Republic filed an exception; (2) each
ruling of the Special Master on a dispositive issue; and (3) each ruling by
the circuit court that adopted the special master’s ruling on a dispositive
issue. (Case No. 17-CV-734, Docket #17 at 3). The FDIC opposes Old
Republic’s motion to vacate, primarily arguing that the reference order in
these cases is materially different from the order in Universal Processing
because it did not delegate to the special master authority to decide
dispositive motions.
The parties’ first disagreement, though, is about what law applies to
the motion. The FDIC argues that because these actions have been removed,
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all of the prior orders of the state court are now deemed orders of this Court.
Williams v. Lampe, 399 F.3d 867, 870 (7th Cir. 2005) (“A removed action
proceeds as if it had originally been brought in federal court; thus, we take
the case as though everything done in the state court had been done in the
federal district court.”). According to the FDIC, then, Universal Processing
has no bearing on this action because it rests on an interpretation of
Wisconsin constitutional law. Appointment of special masters in federal
court is governed by Rule 53.
Old Republic counters, and the Seventh Circuit holds, that
“[b]ecause federal procedure does not apply until removal occurs, Fed. R.
Civ. P. 81(c), we apply state rules to preremoval conduct.” Price v. Wyeth
Holding Corp., 5050 F.3d 624, 628 (7th Cir. 2007) (citing Romo v. Gulf Stream
Coach, Inc., 250 F.3d 1119, 1122 (7th Cir. 2001)). Rule 81(c) clearly states that
“[t]hese rules apply to a civil action after it is removed from a state court.”
Fed. R. Civ. P 81(c) (emphasis added). This Court agrees, then, that while
Rule 53 might apply to future actions of a special master appointed by this
Court, Wisconsin law alone determines whether the reference order was
procedurally valid. To the extent there is any inconsistency between this
holding and Williams (and it is not clear that this is the case), this Court is
constrained to apply the plain language of Rule 81 and Price’s later-in-time
holding. Therefore, the rule from Universal Processing governs whether the
reference order entered in these cases is lawful.
Applying the holding of Universal Processing, it appears that the
“erroneous exercise of discretion” standard of review mandated by the
reference order in these cases violates the Wisconsin constitution. As in
Universal Processing, the order here provides that only those rulings of the
special master to which exceptions are filed will be reviewed by the circuit
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court, and those rulings will be modified or set aside only if the circuit court
determines that the special master erroneously exercised his discretion in
reaching his decision. Under Universal Processing, this lenient of standard of
review, even as it relates to discovery and other non-dispositive issues, is
unconstitutional in the context of a reference order.
Whether the reference order impermissibly delegated the core
judicial power of deciding dispositive issues to the special master is not as
clear. The order at issue in Universal Processing stated that “[a]ll motions
filed, whether discovery or dispositive, shall initially be heard and decided by
the [special master], subject to review processes available as described
below.” Universal Processing, 892 N.W.2d at 274 (emphasis added). Several
dispositive motions were submitted to and decided in the first instance by
the special master. Id. at 275. Here, the reference order empowers the special
master to hear and decide “all pre-trial motions arising in this case which
are hereby assigned to the [special master]” and goes on to specifically
address the special master’s role in discovery disputes but not dispositive
motions. (Case No. 17-CV-734, Docket #2 at 2). The only time dispositive
motions are mentioned in the reference order at issue here is to explain the
special master’s role in scheduling them. Id. at 3.
The problem comes into focus with regard to a dispositive issue that
was resolved first by the special master and then by the circuit court judge:
the applicability of Wisconsin Statutes section 631.11(4)(b), which governs
the circumstances under which an insurer may rescind a policy or assert a
general defense to all claims under the policy. In the context of a discovery
dispute in April 2013, the special master decided that Section 631.11(4)(b)
applied to bar Old Republic from asserting grounds for any individual
claim denial that it did not first bring to the banks’ attention within sixty
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days of obtaining knowledge of the existence of facts giving rise to those
grounds for denial. (Case No. 17-CV-734, Docket #19-11 at 7-9). The special
master noted in his order that the ruling was made for the purpose of
facilitating ongoing discovery but was subject to any future order by the
circuit court judge on the applicability of the statute. Id. at 8. Judge Richard
Sankovitz, who had taken over the case from Judge DiMotto, thereafter set
a schedule and page limits for briefing of the Section 631.11(4)(b) issue,
treating it like a dispositive motion. He ultimately issued a decision and
order in which he arrived at the same result as did the special master
regarding the applicability of Section 631.11(4)(b)—he therein “affirm[ed]
the Special Master’s decision”—but came to his conclusion by way of a
different analysis. (Docket #2-18 and #25-11 at 5). The order does not explain
what standard of review, if any, Judge Sankovitz applied to arrive at his
conclusion.
Ultimately, this ambiguity does not affect the outcome of the
pending motions to vacate. If Judge Sankovitz treated the Section
631.11(4)(b) issue as a discovery ruling by the special master which he then
reviewed for erroneous exercise of discretion, Judge Sankovitz’s order must
be vacated for the reasons explained above. If, on the other hand, he treated
the Section 631.11(4)(b) issue as a dispositive ruling made by the special
master which he then reviewed de novo (which appears more likely), his
order still must be vacated. The Universal Processing court rejected the
argument that a circuit court’s de novo review of a special master ruling
would “cure” the constitutional defect stemming from a reference order
that prescribed an erroneous exercise of discretion standard. Universal
Processing, 892 N.W.2d at 286. It is the nature of the reference order, not the
conduct of the circuit court, that must be scrutinized for constitutionality.
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Id. The reference order here directs that any special master ruling reviewed
by the circuit court upon an exception will be overturned only for an
erroneous exercise of discretion. That is sufficient to warrant vacatur under
Universal Processing.
Therefore, the Court will vacate all rulings of the special master to
which any party filed an exception, and rulings of the circuit court either
affirming or overturning the special master’s rulings, including Judge
Sankovitz’s May 23, 2017 order affirming the special master’s ruling on the
applicability of Section 631.11(4)(b).
2.3

Subject-Matter Jurisdiction

Next, the Court expresses serious reservations at this juncture about
the propriety of its ongoing exercise of subject-matter jurisdiction in the ‘737
and ‘772 cases. As explained above, FIRREA creates federal question
jurisdiction over civil suits involving the FDIC. 12 U.S.C. § 1819(b)(2)(A).
But there is an exception to this jurisdiction, often referred to as the “statelaw exception,” which is triggered for any action
(i)

to which the [FDIC], in the [FDIC]’s capacity as
receiver of a State insured depository institution by the
exclusive appointment by State authorities, is a party
other than as a plaintiff;

(ii)

which involves only the preclosing rights against the
State insured depository institution, or obligations
owing to, depositors, creditors, or stockholders by the
State insured depository institution; and

(iii)

in which only the interpretation of the law of such State
is necessary.

12 U.S.C. § 1819(b)(2)(D).
Where a complaint invokes only state law on its face, the availability
of a colorable federal-law defense places the case outside the state-law

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exception. See Holmes v. F.D.I.C., No. 11-CV-211, 2011 WL 1750227, at *1–2
(E.D. Wis. May 6, 2011) (citing cases). In the ‘737 and ‘772 cases, where the
FDIC is not the plaintiff, the FDIC’s notices of removal attest that the statelaw exception does not apply because “the FDIC-R will assert—among
other things—colorable federal defenses and statutory special powers.”
(Case No. 17-CV-737, Docket #1 at 3; Case No. 17-CV-772, Docket #1 at 3).
To date, it does not appear, apart from form defenses pled in the FDIC’s
answers, that any such federal defenses or statutory powers have been
genuinely asserted. The dispositive motion deadline in these cases has
passed. Unless the FDIC asserts a colorable federal defense to the
dispositive motion pending in the ‘737 case, the Court will be constrained
to stay that case and order briefing on the issue of subject-matter
jurisdiction before moving forward. As for the ‘772 case, it will be stayed
immediately for reasons explained below.
2.4

Motion to Dismiss

The state court action underlying the ‘772 case was originally filed
by BMO in Milwaukee County Circuit Court in March 2017. It concerns the
same insurance policies at issue in the state court proceeding that became
the ‘737 case, filed in 2009. BMO contends that after it filed the 2009 action,
Old Republic continued to deny claims and rescind coverage on more
individual loans. BMO at first added those new claims to the 2009 action,
but as this became burdensome, Judge Sankovitz granted leave to BMO to
file a separate action to address claims that accrued after the 2009 action
was filed, leaving to Old Republic the right to object. (Case No. 17-CV-737,

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Docket #4-13).2 BMO reports that its intent was to file and immediately stay
the new action, except to add newly accrued claims, once answers were
filed. (Case No. 17-CV-772, Docket #19 at 7–8). Removal occurred before the
defendants answered, and therefore BMO never moved for a stay of the
new action in state court. Id.
Old Republic has moved to dismiss BMO’s complaint in the ‘772
case, arguing that BMO has violated the prohibition against claim-splitting
by duplicating in its 2017 action (now the ‘772 case) legal claims that it
asserted in the 2009 action, including claims or issues that Old Republic
contends the circuit court already rejected. (Case No. 17-CV-772, Docket
#15). Old Republic asserts that the ‘772 case involves hundreds of precisely
the same individual insurance claims that are already at issue in the ‘737
case.
In light of the overlap between the ‘737 and ‘772 cases with regard to
at least some active individual claims, the possible jurisdictional defect in
this case described above, and the fact that the ‘737 case appears much
closer to resolution, the Court finds it most prudent to deny Old Republic’s
motion to dismiss without prejudice and stay the ‘772 case. If and when the
Court is satisfied that it has proper subject-matter jurisdiction over the
related ‘737 case, the Court will lift the stay and invite briefing on the issue
of jurisdiction in this case. If and when that issue is resolved, the Court will
invite renewed briefing on the motion to dismiss.

To further complicate matters, it appears this order of Judge Sankovitz
resulted from an exception filed to a ruling of the special master. If that is the case,
the order would be vacated for the reasons explained above.
2

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2.5

Motions to Seal

Finally, the Court will grant the myriad motions to file certain
pleadings and submissions under seal. (Case No. 17-CV-734, Docket #4, #16,
#37, #48, #54, #60; Case No. 17-CV-737, Docket #5, #18, #33, #53, #59, #63,
#68, #69, #113, #115; Case No. 17-CV-772, Docket #40, #46, #50, #55). The
protective order entered by the circuit court to protect the confidentiality of
borrower information remains active in this case following removal and
demands the sealing of these filings. The parties are free to move the Court
for a revised protective order if they believe the parameters of the circuit
court’s protective order are no longer appropriate or necessary.
3.

CONCLUSION
Based on the foregoing, the Court will grant the FDIC’s motion to

file an abridged state court record, grant the myriad motions to seal, grant
Old Republic’s motions to vacate in the ‘734 and ‘737 cases, deny without
prejudice Old Republic’s motion to dismiss in the ‘772 case, and stay the’772
case. The Court will also order that the parties file, either independently or
jointly if they can agree, a notice identifying all rulings of the circuit court
that are vacated by this Court’s resolution of the motions to vacate. The
Court will allow the parties until November 1, 2018 to file that notice,
leaving a window of opportunity for the parties’ efforts toward resolution
to come to fruition before the parties and the Court resume the substantial
work necessary to move these cases forward.
Accordingly,
IT IS ORDERED that the FDIC’s motions to file an abridged state
court record (Case No. 17-CV-734, Docket #5; Case No. 17-CV-737, Docket
#6) be and the same are hereby GRANTED;

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IT IS FURTHER ORDERED that Old Republic’s motions to
supplement the record (Case No. 17-CV-734, Docket #21, #51, and #69; Case
No. 17-CV-737, Docket #23, #31, #62, #79; Case No. 17-CV-772, Docket #49)
be and the same are hereby GRANTED;
IT IS FURTHER ORDERED that Old Republic’s motions to vacate
(Case No. 17-CV-734, Docket #17; Case No. 17-CV-737, Docket #19) be and
the same are hereby GRANTED. Within 30 days of the entry of this Order,
each party, or all parties jointly, are directed to submit a notice identifying
all orders or rulings from the circuit court that are vacated pursuant to this
Order;
IT IS FURTHER ORDERED that Old Republic’s motion to dismiss
(Case No. 17-CV-772, Docket #15) be and the same is hereby DENIED
without prejudice;
IT IS ORDERED that the motions to file certain pleadings under seal
(Case No. 17-CV-734, Docket #4, #16, #37, #48, #54, #60; Case No. 17-CV-737,
Docket #5, #18, #33, #53, #59, #63, #68, #69, #113, #115; Case No. 17-CV-772,
Docket #40, #46, #50, #55) be and the same are hereby GRANTED; and
IT IS FURTHER ORDERED that Case No. 17-CV-772 be and the
same is hereby STAYED until further order of this Court.
Dated at Milwaukee, Wisconsin, this 27th day of September, 2018.
BY THE COURT:

____________________________________
J. P. Stadtmueller
U.S. District Judge

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