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Reorganization and Liquidation

COURT DENIES INSOLVENT INSURER’S MOTION TO DISMISS; ACTION TO BAR ARBITRATION WILL PROCEED

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Plaintiff, Midwest Employers Casualty Company (“MECC”) filed an action to bar Legion Insurance Company (“Legion”) from arbitrating forty-three reinsurance contracts, which MECC claimed did not contain arbitration provisions. MECC also sought a declaration of its liability under those contracts. Legion filed a motion to dismiss on four separate grounds. The court denied the motion to dismiss.

First, Legion, which is in liquidation, argued that because the Pennsylvania court had in rem jurisdiction over its assets, the Missouri federal court could not exercise jurisdiction. The court disagreed, finding that while the liquidation action was in rem, the present action was in personam. Second, Legion argued that the case was “reverse preempted” by the McCarran-Ferguson Act. The court disagreed on the basis that the ultimate issue in the case was a standard contract dispute, and did not involve the state’s regulation of insurance. Third, Legion argued that the court should abstain from deciding the case under Burford v. Sun Oil Company. In Burford, the Supreme Court held that abstention is appropriate where “exercise of federal review of the question in a case and in similar cases would be disruptive of state efforts to establish a coherent policy with respect to a matter of substantial public concern.” The district court concluded that abstention under Burford was not appropriate because this case did not affect complex state administrative processes and would not impair the liquidation process. Finally, Legion argued that full faith and credit and the principle of comity required the court to defer to the liquidation proceedings. The court disagreed, finding that those principles did not prevent its exercise of jurisdiction. Midwest Employers Casualty Co. v. Legion Ins. Co., Case No. 4:07-cv-00870, (USDC E.D. Mo. Nov. 11, 2007).

ENGLISH COURT ALLOWS UNDERWRITER TO CONTINUE RUN-OFF BUSINESS

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In 2003, insurer Europ Assistance, and underwriter, Temple Legal Protection, entered into a binding authority agreement that authorized Temple to write ‘after the expenses’ coverage and handle claims on behalf of Europ. In exchange, Temple received 35% commission on the net premium. In 2005, Europ terminated the business with respect to new business, and in April 2007, Europ informed Temple that it planned to revoke all of Temple’s authority. Temple asserted that Europ repudiated the binding authority agreement.

While waiting for resolution of the underlying dispute, Europ sought an injunction barring Temple from continuing to carry on the run-off business, alleging that Temple was causing loss by unlawful means and was guilty of unlawful interference and breach of trust in failing to hand over premiums.

Balancing the interest of both parties, the English court refused to enjoin Temple from continuing with the run-off business. The court seemed influenced by the fact that Europ, a subsidiary of the well known and substantial Italian insurance company Assurazioni Generali SpA, had no continuing interest in the expenses business. In contrast, Temple, a small company, would be adversely affected if it were barred from running off the business. Europ Assistance Ins. Ltd. v. Temple Legal Protection Ltd., [2007] EWHC 1785 (Queen’s Bench July 25, 2007).

ILLINOIS COURT GRANTS SUMMARY JUDGMENT TO INSURANCE COMMISSIONER, AS STATUTORY LIQUIDATOR, ON RESCISSION AND SETOFF AFFIRMATIVE DEFENSES

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We have reported previously on developments in Legion Insurance’s liquidation proceeding (see January 16, 2007 and April 26, 2007 posts), including an attempt to recover premiums allegedly owed by American Patriot Insurance Agency, Inc. (“American Patriot”) relating to a workers’ compensation program under a limited agency agreement.

On September 7, an Illinois federal court granted the Commissioner’s motion for summary judgment on American Patriot’s affirmative defenses for setoff and rescission. The court concluded that American Patriot had waived their right to rescind the limited agency agreement where they failed to take any steps towards rescinding the agreement until three years after they acquired knowledge of the fraud, coupled with Defendants’ continued retention of the benefits of the contract. With respect to American Patriot’s setoff defense, the liquidator contended that the alleged debts could not be mutual because they were not due and owing between the same parties or based upon the same contracts, and that mutuality of capacity was lacking because the premium owed by American Patriot were held in a fiduciary capacity. The judge agreed, stating that “the debts asserted by Defendants lack a mutuality of time with the debts asserted against them by the Liquidator, and Defendants’ claim for setoff must be dismissed on these grounds.”

The court denied summary judgment to the liquidator on American Patriot’s remaining affirmative defenses of unclean hands, fraud, negligent misrepresentation, estoppel of a 2000 program year and breach of contract. Ario v. American Patriot Ins. Agency, Case No. 05 C 1049 (N.D.Ill. September 7, 2007).

CREDITOR’S BREACH OF CONTRACT CLAIM BARRED BY FAILURE TO FILE CLAIM IN SEPARATE LIQUIDATION PROCEEDING

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Plaintiff, Propak Loigistics, insured workers' compensation risks with Clarendon National Insurance Company, which reinsured the risks with Defendant, Foundation Insurance Company. Foundation entered into a risk sharing agreement directly with Propak, which was essentially an experience rating agreement. Foundation was placed in liquidation. Clarendon filed a timely claim in the liquidation estate, but Propak did not. The liquidation court entered an order distributing the remaining assets of Foundation to Clarendon. Because Propak failed to file notice of its claims under the Liquidation Order, the court held that it was barred from obtaining relief, noting that under South Carolina law, “the failure of a potential creditor to submit a claim in the liquidation estate, or have an ancillary estate opened in a reciprocal state, is conclusive as to that creditor’s rights.” Propak Logistics v. Foundation Ins. Co., No. 04-2178 (W.D.Ark., August 8, 2007).

DISTRICT COURT AFFIRMS BANKRUPTCY COURT ORDER DENYING IMPOSITION OF CONSTRUCTIVE TRUST

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This matter came before the Northern District of New York on appeal from a Bankruptcy Court Order, awarding Richard Breeden, Chapter 11 trustee (the “Trustee”) of The Bennett Funding Group, judgment on the pleadings and dismissing the Ades and Berg Groups’ (the “Ades Investors”) counterclaims for imposition of a constructive trust upon the proceeds of a reinsurance policy allegedly covering the Ades Investors’ losses. The proceeds of the reinsurance policy were to be paid to the Trustee pursuant to the terms of a settlement agreement with Sphere Drake.

In a de novo review, the Court affirmed the Bankruptcy Court’s Order, concluding that the Ades Investors’ claim failed to satisfy all four elements applicable under New York law for the imposition of a constructive trust. Specifically, the Court concluded that while three of the four elements were satisfied, the fourth element, requiring a showing that the Trustee was unjustly enriched when he retained the settlement proceeds from Sphere Drake, was not met. In re: The Bennett Funding Group, Case No. 97-70049 (N.D.N.Y. July 10, 2007).