Reorganization and Liquidation

SECOND CIRCUIT AFFIRMS DISMISSAL OF INSUREDS’ CONSTRUCTIVE TRUST COUNTERCLAIM OVER REINSURANCE BANKRUPTCY SETTLEMENT PROCEEDS

January 13, 2009 by Carlton Fields

The “Ades” and “Berg” groups of investors (the “Ades Berg Group”), were parties who joined in the bankruptcy proceedings of the Bennett Funding Group, Inc. and related companies (the “Bennett Group”), based on claims that, among other things, the Bennett Group had defrauded them in an investment scheme. The Bennett Group was insured under a reinsurance contract issued by Sphere Drake Insurance PLC (“Sphere Drake”). A settlement was reached in the course of the bankruptcy proceedings between some groups of investors and Sphere Drake. As part of the settlement, Sphere Drake made some payments to certain parties, and held remaining policy proceeds for distribution to remaining parties in the bankruptcy.

Richard Breeden, as bankruptcy Trustee of the Bennett Group, asserted declaratory claims within the context of the bankruptcy proceeding against Sphere Drake and the Ades Berg Group pertaining to the distribution of unallocated policy proceeds. The Ades Berg Group asserted a counterclaim against Mr. Breeden, seeking the imposition of a constructive trust over any remaining insurance proceeds. Mr. Breeden sought dismissal of the counterclaim, arguing that the imposition of a constructive trust would inequitably interfere with his duties as Trustee to distribute proceeds to remaining debtors in accordance with applicable federal bankruptcy law. The bankruptcy court agreed, dismissing the counterclaim, with prejudice, based in part on principles embodied in the federal bankruptcy laws. The Second Circuit Court of Appeals affirmed, finding that the New York state law equitable principles urged by The Ades Berg Group did not conflict with the purposes of the federal bankruptcy laws, and that the bankruptcy court’s ruling thus did not run afoul of recent U.S. Supreme Court precedent cited by the Ades Berg Group, which reaffirmed the principle that constructive trusts should be determined with reference to state law. In re Ades and Berg Group Investors, No. 07-3464 (2d Cir. Dec. 16, 2008).

This post written by John Pitblado.

UK COURT REFUSES TO HOLD DIRECTOR LIABLE ON JUDGMENT AGAINST INSURER

January 9, 2009 by Carlton Fields

As we previously posted in July, 2007, a UK court assessed costs against insurance broker Horace Holman & Co. (“Horace”) in an action Horace brought against Equitas Ltd. (“Equitas”) which the Court found to be “largely fruitless.” The matter was recently brought back before the Court by Equitas, which sought post-judgment enforcement of the order, insofar as Horace has not made ordered payments. Horace responded that it was in liquidation proceedings, and Equitas responded by asserting that Horace’s liability is recoverable from Mr. Arwyn Powell, who was added as a party to the proceeding. Mr. Powell was Holman’s sole shareholder and managing director, and also shareholder and director of related companies, including Camomile Management Consulting Ltd. (“Camomile”), which was a creditor of Horace in the liquidation proceedings.

The Court rejected the enforcement orders sought by Equitas. First, the Court rejected the allegation that Horace’s liquidation was a previously devised plan to avoid any judgment in the event one was obtained against it, and that Equitas thus had no further rights against Horace than as creditor in the liquidation proceedings. The court rejected claims directly against Mr. Powell as sole shareholder of Horace, finding no ground for “piercing the corporate veil.” The Court also rejected the claim that Powell, as Camomile’s shareholder, stood to benefit from liquidation, and Camomile’s position as creditor in that proceeding. Finally, the Court found it dispositive that Equitas failed to warn Powell that it would seek to recover directly against him, prior to making its application for such recovery. Equitas Ltd. v. Horace Holman & Co., Ltd. [2008] EWHC 2287 (Comm) (Oct. 3, 2008).

This post written by John Pitblado.

ENGLISH REINSURANCE ASSETS TO BE REMITTED TO AUSTRALIAN LIQUIDATORS, BUT FOR WHAT REASON?

January 8, 2009 by Carlton Fields

In a July 12, 2007 post, we reported on issues relating to HIH Casualty and General Insurance Limited (“HIH”). The question before the court was whether it had jurisdiction to entertain a request under the Insolvency Act for directions to the liquidators in England to transfer assets collected by them to the liquidators in an Australian liquidation. The Court of Appeal held that it would not direct a transfer of the English assets by the English provisional liquidators to the Australian liquidators because to do so would prejudice the interests of many of the creditors. The House of Lords disagreed, allowing an appeal and ruling that the English assets of the insolvent insurer should be remitted to the Australian liquidator. There were sharp differences of opinion as to why exactly that should be the case.

The HIH group presented winding up petitions to the Supreme Court of New South Wales in 2001. Some of the assets, which consisted mostly of reinsurance claims on London policies, were situated in England, so English provisional liquidators were appointed. The Australian judge subsequently issued winding up orders and sent a letter to the High Court in London asking that the provisional liquidators remit the assets to the Australian liquidators for distribution in accordance with Australian law. The question on appeal was whether the English court could and should accede to the request. The alternative was a separate liquidation and distribution of the English assets under the English Insolvency Act of 1986. The manner of distribution mattered because Australian law generally gave priority to insurance creditors at the expense of other creditors, while the same result would not obtain under English law.

The decision was resolved primarily by analyzing the tension between section 426(4) of the Insolvency Act, which allows an English court with insolvency jurisdiction to assist designated foreign courts (including Australian courts), and section 426(5) of the same Act, which allows a court discretion to provide assistance in accordance with the rules of private international law, including the common law principle of “modified universalism.” That principle requires United Kingdom courts to cooperate with Australian courts to ensure that all the assets are distributed under a single system of distribution. While the court stated that a refusal to remit the assets might be appropriate if it causes a manifest injustice to a creditor, it ultimately found that the Australian distribution was not unacceptably discriminatory or contrary to public policy.

The dispute was focused on whether the basis of jurisdiction ought to be grounded in the common law considerations allowed by section 426(5) or the discrete statutory authority of section 426(4). Lord Hoffmann would have allowed the remission solely through the exercise of common law principles. He argued that under the common law doctrine of ancillary winding up, English courts may “disapply” parts of the statutory scheme by authorizing the English liquidator to allow actions he is obliged by statute to perform in accordance with English law to be performed by the foreign liquidator in accordance with foreign law. Others, including Lord Phillips, rejected this view: “I do not propose to stray from the firm area of common ground [of allowing the appeal under section 426] onto the controversial area of whether, in the absence of statutory jurisdiction, the same result could have been reached under a discretion available under the common law.” Lord Neuberger, too, opposed Lord Hoffman’s view, stating that he took “the view that it would not have been open to an English court to make the order sought by the Australian liquidators in the absence of section 426(4) and (5) of the 1986 Act.” McGrath v. Riddell [2008] 1 WLR 852, [2008] UKHL 21 (Apr. 9, 2008).

This post written by Brian Perryman.

UPDATE: COURT ENTERS DEFAULT JUDGMENT AWARDING COMPENSATORY DAMAGES PLUS INTEREST

November 19, 2008 by Carlton Fields

On December 20, 2007, we reported that claims arising out of allegedly purposeful undercapitalization of a captive reinsurer survived a motion to dismiss. Since that time, the plaintiff (rehabilitator for Frontier Insurance Co.) moved for entry of a declaratory judgment and an award of compensatory damages plus prejudgment interest by default.

The Southern District of California concluded that plaintiff met the standards for entry of a default judgment, adequately alleged both an enforceable contract and a breach of contract by ASIL (the captive reinsurer), and that the default was not due to excusable neglect. ASIL indicated to Frontier that it would “allow judgment to be entered by default and pay all the available funds to Frontier.” The court granted the motion for entry of default and entered a judgment finding ASIL liable to plaintiff for $577,966.33 in compensatory damages and $91,511.33 in prejudgment interest (calculated at 10% per annum). Mills v. Ramona Tire, Inc., Case No. 07-0052 (USDC S.D. Cal., Sept. 23, 2008).

This post written by John Black.

REINSURED’S CONSTITUTIONAL TAKINGS CLAIM AGAINST UNITED STATES DISMISSED FOR FAILURE TO ALLEGE LOSS OF ACTUAL “PROPERTY”

November 13, 2008 by Carlton Fields

We previously posted on March 17, 2008 about a bankruptcy judgment in favor of a reinsured, Acceptance Insurance Companies, Inc. (“Acceptance”), which sought to be excused from the payment of $9 million in premium owed to its reinsurer for the remaining term of a five year contract because it had ceased writing the underlying crop insurance which was the subject of the reinsurance contract. As we posted, a bankruptcy appellate panel of the US Court of Appeals for the Eighth Circuit reversed the judgment, finding that Acceptance’s failure to continue writing the underlying risk did not excuse it from its premium obligation to the reinsurer.

Separately, Acceptance had also filed suit in the Federal Court of Claims, seeking money damages against the United States on the theory that it was forced to stop writing its crop insurance business, which had become worthless due to the unwarranted regulatory action of the U.S. Department of Agriculture Risk Management Agency (“RMA”). In particular, Acceptance alleged that an RMA Administrator improperly rejected a deal requiring his regulatory approval, by which Acceptance had proposed to sell its crop insurance business to an interested third party. Acceptance alleged that the subsequent failure of the deal caused the loss of all value of its crop insurance business, which loss constituted an unwarranted governmental taking of its property under the Fifth Amendment. The United States moved to dismiss Acceptance’s claim for failure to state a legally cognizable cause of action. The court granted the government’s motion, distinguishing the taking of “property” from government action which merely has the effect of interfering with or frustrating the performance of a contract. The court found that, despite regulatory action which allegedly rendered the property worthless, Acceptance nevertheless retained possession of the business, and thus lost no “property” as that term is construed under applicable Fifth Amendment takings jurisprudence. Acceptance Insurance Companies, Inc. v. United States, No. 03-2794 (Fed. Cl. Sept. 25, 2008).

This post written by John Pitblado.