Reorganization and Liquidation

No McCarran-Ferguson Reverse Pre-Emption Under State Insurance Insolvency Statutes

April 28, 2010 by Carlton Fields

Acting as Rehabilitator of Centaur Insurance Company, the Director of the Illinois Department of Insurance, Michael McRaith, brought suit against two reinsurers, seeking a declaration that they are obligated to reimburse Centaur for portions of a $32 million settlement it agreed to in resolving underlying asbestos litigation. The reinsurers had removed the case to federal court, but McRaith sought a remand based on the doctrines of McCarran-Ferguson reverse preemption and Burford abstention. The court denied the motion to remand under both theories, finding that none of the McCarran-Ferguson reverse preemption criteria had been met, as the state law issues pertaining to the rehabilitation proceedings did not specifically relate to the business of insurance, and there was not a clear conflict with federal law vis-à-vis state insurance solvency rehabilitation procedure. Burford abstention was also inappropriate because the dispute pertained less to the “complex [state] regulations pertaining to insolvent insurers” than to a simple breach of contract dispute between the parties under certain reinsurance certificates. McRaith v. American Re-Insurance Co., No. 09-C-4027 (USDC N.D. Ill. Feb. 17, 2010).

This post written by John Pitblado.

NEW YORK LAW APPLIES TO ALL CLAIMS IN THE MIDLAND INSURANCE COMPANY LIQUIDATION PROCEEDING

March 17, 2010 by Carlton Fields

In this long-running legal saga surrounding the liquidation of Midland Insurance Company (“Midland”), the Superintendent of Insurance, Midland’s reinsurers, and certain major policyholders stipulated to a case management order for determining the issue of whether New York substantive law controlled the interpretation of the Midland insurance policies at issue or whether the New York choice-of-law test must be conducted for each policy to determine the applicable substantive law. The trial court granted the policyholders’ motion for partial summary judgment, declaring that a choice-of-law review for each policyholder must be undertaken. This appeal followed. The New York appellate court first recounted its 1990 decision involving Midland and another policyholder where the choice-of-law issue was not litigated but the court stated that New York substantive law applied so that Midland’s creditors would receive equal treatment. The appellate court then reversed the trial court’s order for the following reasons: (1) the application of New York law in the prior case is binding on the trial court under the doctrine of stare decisis; (2) the “law of the case” precluded the policyholders from re-litigating an issue decided in an ongoing proceeding, finding that the policyholders in this case had identical interests with the policyholder in the 1990 case; and (3) that public policy required the equal treatment of all creditors in a liquidation proceeding. Finally, the court granted the intervening reinsurers’ cross motion, declaring that New York substantive law controlled the interpretation of the Midland insurance policies. In re Liquidation of Midland Ins. Co., 2010 NY Slip Op 00209 (N.Y. App. Div. Jan. 12, 2010).

This post written by Dan Crisp.

SCOTTISH COURT BREATHES NEW LIFE INTO PETITION TO APPROVE SOLVENT SCHEME OF ARRANGEMENT

February 9, 2010 by Carlton Fields

The Scottish Court of Session, Inner House, has reversed a ruling of its Outer House refusing to approve a scheme of arrangement under the U.K. Companies Act of 2006.

A scheme of arrangement is a reorganization device through which a company may compromise its creditors’ claims with the approval of at least three-quarters of its creditors. A scheme of arrangement generally involves three stages. First, there must be a judicial application for an order summoning a meeting of creditors. Second, the scheme proposals are put to the meeting and are approved (or not) by the requisite majority. Finally, if the scheme is approved at the meeting, there must be a further application to the court for sanction of the arrangement.

In Petition of Scottish Lion Insurance Company, Scottish Lion, in runoff since late 1994, proposed in 2008 a scheme of arrangement to terminate exposures under short- and long-tail policies. The scheme was opposed by U.S.-based creditors insured under general liability or general aviation insurance policies with Scottish Lion. The Outer House declined to approve the scheme, concluding that sanctioning the scheme smacked of “unreasonableness” to minority creditors, and asking rhetorically, “where the Company is sound financially, why should one group of creditors who might wish to enter into a commutation agreement with the Company be entitled to force other creditors to participate against their will?” The Inner House disagreed. Although the court acknowledged that insureds who were being required to accept current estimated values in lieu of their contingent claims may “possibly with other arguments, win the day,” it concluded that such circumstance alone was not so overwhelming a factor against the sanction. The case was remitted to the Outer House for further proceedings.

This post written by Brian Perryman.

NO INTERLOCUTORY APPEALS IN REINSURANCE FRAUDULENT CONVEYANCE CASE

December 16, 2009 by Carlton Fields

In an ongoing fraudulent conveyance dispute, the district court denied cross-motions for certificates of interlocutory appeals of summary judgment orders against the plaintiff rehabilitator of an insurance company and one of the two defendants. We previously reported on the court’s denial of cross-motions for reconsideration of the summary judgment orders in a July 22, 2009 post. The rehabilitator sought to appeal the order finding there was no evidence that payments made to the reinsurer were “disproportionately small” or not the result of arms-length negotiations. The court denied this motion principally on the grounds that it would embroil the appellate court in a fact-intensive analysis. The defendant’s cross-motion also was denied. It sought an appeal of whether it was a direct or initial transferee under fraudulent conveyance law. Noting that courts usually do not allow interlocutory appeals of denials of summary judgment, the court found there were disputed issues of fact that would be better determined by a jury before proceeding to an appeal. Mills v. Everest Reinsurance Co., Case No. 05-8928 (USDC S.D.N.Y. October 28, 2009).

This post written by Brian Perryman.

DISTRICT COURT FINDS THAT SERVICE OF SUIT CLAUSE WAIVES RIGHT OF REMOVAL

December 8, 2009 by Carlton Fields

In his capacity as Liquidator of Midland Insurance Company, the Superintendent of Insurance of the State of New York brought suit in New York Supreme Court against Dunav Re, a Serbian reinsurance company, seeking reinsurance monies owed. Dunav Re removed the action to federal court based on diversity jurisdiction, and the Superintendent subsequently moved to remand based on the ground that Dunav Re had consented to the jurisdiction of any competent court pursuant to the service of suit clause in the reinsurance agreements. Dunav Re argued that removal was proper because the service of suit clause’s language was ambiguous and the waiver of the right to removal had to be clear and unequivocal. The court found no ambiguity, citing a New York Court of Appeals decision stating the reinsurance industry has known since a 1949 decision that a service of suit clause waived removal, and granted the motion to remand. Dinallo v. Dunav Ins. Co., Case No. 09-5575 (USDC S.D.N.Y. Nov. 19, 2009).

This post written by Dan Crisp.