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Reorganization and Liquidation

COURT UPHOLDS SANCTIONS ORDER BASED UPON FRIVOLOUS APPEAL BY LLOYDS NAME

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In 1979, Bennett signed a contract with Lloyd’s as a Name to provide underwriting capital for insurance syndicates. The contract contained clauses stating that English law applied to Names’ disputes and such disputes can only be resolved in the courts of England. At the time the contract was signed, Lloyd’s failed to disclose massive anticipated losses. In 1998, Bennett and 600 other Names sought to avoid the forum selection and choice of law clauses. The Ninth Circuit upheld the clauses. Lloyd’s sued in England and won a large judgment against non-settling Names to recover mandatory premiums. Lloyd’s then sought to enforce its claim against Bennett, a non-settling Name, in Utah District Court. The court found in favor of Lloyd’s. Bennett appealed, and this appeal was consolidated with other Names cases in the Reinhart case before the Tenth Circuit. The circuit court upheld the forum selection and choice of law clauses.

During the pendency of the Reinhart appeal, Bennett filed for bankruptcy and brought two separate lawsuits under the auspices of the bankruptcy case. The parties stipulated to the dismissal of the first suit, and the second suit went to trial. In the second suit, the court granted Lloyd’s summary judgment motion and a motion for sanctions, finding that the forum selection issue had been previously determined. Bennett appealed, but the district court affirmed the ruling.

Bennett appealed the bankruptcy court’s sanctions order, again advancing arguments against the forum selection clause. The court upheld the award of sanctions, finding the appeal from the bankruptcy court to be frivolous, and that “no reasonable attorney” could believe otherwise based upon the doctrine of res judicata and the Tenth Circuit’s prior opinions. Bennett v. Soc’y of Lloyd’s (In re Bennett), Case No. 2:07-CV-736 TS (USDC Utah Sept. 24, 2008).

This post written by Dan Crisp.

NEW HAMPSHIRE SUPREME COURT CLEARS THE WAY FOR SETOFF OF REINSURANCE CLAIMS SUBJECT TO A “PUT-BACK” PROVISION

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The Supreme Court of New Hampshire has reversed a trial court’s ruling denying a reinsurer’s (CIC) asserted setoff of reinsurance claims in the liquidation of the Home Insurance Company (Home). CIC reinsured Home, remitting money to Home under a claims protocol that provided for a right of setoff controlled by a New Hampshire statute. Separately, CIC also reinsured certain affiliated insurance companies that had ceded a participation in their liabilities under certain policies in exchange for, among other things, an assignment of all rights to reinsurance recoverables relating to those policies. However, this assignment was qualified by a “put-back” provision that required CIC to return to its affiliated cedents any reinsurance recoverables deemed by CIC to be uncollectible, together with the rights to any related collateral. Among the reinsurance claims assigned to CIC were reinsurance obligations of Home to the affiliated cedents, i.e., reinsurance recoverables. Accordingly, pursuant to the claims protocol between CIC and Home, CIC sought to setoff amounts payable by it to Home against these recoverables.

Home’s liquidator objected to the attempted setoff, arguing that the New Hampshire statute referenced in the claims protocol required that setoff debts be “mutual,” and that the put-back provision destroyed mutuality by rendering the assignment conditional, not absolute. The liquidator contended that the provision made the affiliated cedents, not CIC, ultimately liable for the reinsurance. A referee ruled in favor of the liquidator, and the trial court sustained that ruling, reasoning that the mutuality requirement was not satisfied because the terms of the assignment required the return of uncollectible reinsurance, and so the assignment was conditional. On appeal, the New Hampshire Supreme Court reversed, concluding the assignment was, in fact, absolute, the put-back provision notwithstanding. The Supreme Court found that, although the provision allocated risk to the affiliated cedents, this “retained interest” was not fatal. Importantly, CIC, not the affiliated cedents, controlled implementation of the provision; thus, “the provision did not constitute a prohibited means of control over the reinsurance recoverables or ‘any form of revocation’ in the hands of the affiliated cedents.” In the Matter of the Liquidation of the Home Insurance Company, Case No. 2007-794 (July 25, 2008).

This post written by Brian Perryman.

JUDICIAL PANEL ON MULTIDISTRICT LITIGATION TRANSFERS CASE FILED BY TENNESSEE INSURANCE COMMISSIONER INVOLVING RECIPROCAL OF AMERICA TO PENDING MDL ACTION

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The Tennessee Insurance Commissioner, as liquidator for three risk retention groups, sued General Reinsurance Corp, Milliman, Price Waterhouse Coopers, Wachovia Bank and others in Tennessee state court, alleging a broad based conspiracy and fraud in a reinsurance program involving Reciprocal of America. After the case was removed to federal district court, the Judicial Panel on Multidistrict Litigation granted a motion to transfer the case to the Reciprocal of America Sales Practices Litigation MDL proceeding pending in the Western District of Tennessee. The Panel found that the actions involve questions of fact arising out of relationships and transactions substantially similar to those involved in the MDL action, and that transfer and consolidation therefore was appropriate under 28 U.S.C. section 1407. In re: Reciprocal of America Sales Practices Litigation, MDL No. 1551 (JPML June 5, 2008).

This post written by Rollie Goss.

ATTORNEYS' FEES AND COSTS AWARDED AGAINST NEW YORK SUPERINTENDENT FOR IMPROPER BANKRUPTCY FILING

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The New York Insurance Department, as Liquidator of Nassau Insurance Company, pursued Jeanne Diloreto for 20 years to recover what it contended were assets diverted from Nassau, recovering a judgment in state court that it attempt to execute upon. Superintendent DiNallo ended up filing an involuntary bankruptcy petition against Ms. Diloreto, which was dismissed, in part based upon procedural infirmities. Diloreto sought damages for a bad faith filing, and established to the satisfaction of the bankruptcy court that the motivation for filing the petition was related to a potential recovery in an ancillary malpractice action that Diloreto had filed against her former law firm. The bankruptcy court judge determined that while the filing by Superintendent DiNallo had not been in bad faith, Diloreto nevertheless was entitled to a judgment against Superintendent DiNallo in his capacity as Liquidator in an amount exceeding $70,000 for attorney’s fees and costs, which it Ordered could not be offset against the Liquidator’s state court judgment against Diloreto. This is a procedurally tortured case, centering on a very long running dispute, which included Diloreto purchasing property in Florida shortly after the state court judgment was entered, apparently in the hope of shielding assets under the Florida homestead provision. In re Diloreto, Bank. No. 07-15413 (US Bank. Ct. E.D. Pa. June 19, 2008).

This post written by Rollie Goss.

ATTORNEYS’ FEES AND COSTS AWARDED AGAINST NEW YORK SUPERINTENDENT FOR IMPROPER BANKRUPTCY FILING

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The New York Insurance Department, as Liquidator of Nassau Insurance Company, pursued Jeanne Diloreto for 20 years to recover what it contended were assets diverted from Nassau, recovering a judgment in state court that it attempt to execute upon. Superintendent DiNallo ended up filing an involuntary bankruptcy petition against Ms. Diloreto, which was dismissed, in part based upon procedural infirmities. Diloreto sought damages for a bad faith filing, and established to the satisfaction of the bankruptcy court that the motivation for filing the petition was related to a potential recovery in an ancillary malpractice action that Diloreto had filed against her former law firm. The bankruptcy court judge determined that while the filing by Superintendent DiNallo had not been in bad faith, Diloreto nevertheless was entitled to a judgment against Superintendent DiNallo in his capacity as Liquidator in an amount exceeding $70,000 for attorney’s fees and costs, which it Ordered could not be offset against the Liquidator’s state court judgment against Diloreto. This is a procedurally tortured case, centering on a very long running dispute, which included Diloreto purchasing property in Florida shortly after the state court judgment was entered, apparently in the hope of shielding assets under the Florida homestead provision. In re Diloreto, Bank. No. 07-15413 (US Bank. Ct. E.D. Pa. June 19, 2008).

This post written by Rollie Goss.