In a January 8 post to this blog, we described the partial dismissal of claims in a putative class action alleging that the defendants hid from investors that Converium's loss reserves were hundreds of millions of dollars less than they should have been. The District Court has granted a motion for reconsideration of some aspects of the dismissal of the Securities Exchange Act section 10(b) claim. In re Converium Holding AG Securities Litigation, Case No. 04-7897 (S.D.N.Y. Apr. 9, 2007).
Reorganization and Liquidation
Court affirms summary judgment on reinsurance claims issue based upon res judicata
Two UK-based insurance companies, collectively known as Eagle Star, served as lead underwriter for a quota share reinsurance program reinsuring Legion Indemnity and Legion Insurance. A dispute arose over monies owed under the quota share reinsurance agreements. Legion Insurance was placed in rehabilitation in Pennsylvania, and an Illinois court placed Legion Indemnity under the control of the Illinois Commissioner of Insurance. Eagle Star filed an action against Legion in federal court. The Illinois court granted Eagle Star summary judgment, finding that the Pennsylvania court had determined the issue in Eagle Star's favor as to Legion Insurance, and that Legion Indemnity was bound by the decision based upon its privity with Legion Insurance and the doctrine of res judicata. The Court of Appeals affirmed. In re Liquidation of Legion Indemnity Company, Case No. 02-6695 (Ill. Ct.App. Mar. 29, 2007).
THIRD CIRCUIT DISMISSES SHAREHOLDER’S COMPLAINT AGAINST LIQUIDATOR
This appeal arose out of the liquidation of an insolvent insurer, Colonial Assurance Company (“Colonial”). The Plaintiff, a Colonial shareholder, litigated for years in the Pennsylvania state courts to fight the liquidation plan proposed by Pennsylvania. After his objections were dismissed in that forum, he filed an action in United States District Court alleging that the Defendants violated his civil rights, engaged in a civil conspiracy, and breached their fiduciary duties in relation to the Colonial liquidation. The District Court dismissed his claims under the Rooker-Feldman doctrine, alternatively holding that his claims were barred by the doctrine of res judicata.
On appeal, the Third Circuit concluded that this was not an appropriate case for the application of the Rooker-Feldman doctrine because the Plaintiffs’ Complaint was directed at conduct that preceded the state-court judgment. The Court explained that the Rooker-Feldman doctrine, which prevents inferior federal courts from sitting as appellate courts for state court judgments, does not apply when a party complains of an injury “not caused by the state-court judgment but instead attributable to defendants’ alleged. . .violations that preceded the state-court judgment.” (citations omitted). Nevertheless, the Third Circuit held that dismissal was appropriate because the Plaintiff’s claims were barred by the doctrine of res judicata. All of the elements of res judicata were satisfied, because the parties to the two actions were identical, all of the claims were actually litigated in the prior state court action, and determination of the claims was necessary to the entry of the judgment by the state court. Mazzella v. Commonwealth of Pennsylvania, Case No. 06-2325 (3d Cir. Apr. 17, 2007).
D&O CARRIERS NOT RESPONSIBLE FOR LOSSES SUSTAINED IN FRAUDULENT CONVEYANCE ACTIONS
A New Jersey federal judge ruled that an asset purchase agreement and a quota share reinsurance agreement did not obligate Hartford Fire Insurance Company (“Hartford”) and Twin City Insurance Company (“Twin City”) to step into the shoes of an insolvent insurer and provide coverage to Plaintiff for losses sustained in defending three fraudulent conveyance actions. The underlying fraudulent conveyance actions alleged that an ex-CEO played a shell game with the assets of GAF (the predecessor in interest to G-I) to shield itself from liability in pending asbestos litigation. The present action was originally filed against Reliance, but after Reliance filed for bankruptcy, Plaintiffs joined Hartford and Twin City, alleging that Defendants purchased the assets and renewal rights to Reliance’s D&O book of business and seeking coverage pursuant to that policy.
Ruling on competing summary judgment motions, the District Court said that Hartford and Twin City had no coverage obligation reasoning, among other things, that the “underlying fraudulent conveyance actions constitute a single claim that was first made under the Reliance Policy and before the inception of the Hartford/Twin City Policy” and that the Hartford/Twin City Policy and the Reliance Policy were two separate and distinct policies. G-I Holdings v. Hartford Fire Ins. Co., Case No. 00-6189 (D.N.J., Mar. 16, 2007).
REHABILITATED INSURERS PERMITTED TO DEFER PAYMENTS TO FAIR PLANS
The Rhode Island Supreme Court, in a de novo review, denied an appeal by the Rhode Island and Massachusetts Fair Access to Insurance Requirements (FAIR) Plans relating to a judgment authorizing the deferral of certain payments owed to them under State and Federal law. The Rhode Island and Massachusetts FAIR Plans are funds statutorily established for the purpose of providing basic property insurance to persons who would otherwise be unable to obtain it.
In 2003, the Rhode Island Superior Court placed Pawtucket Mutual Insurance Company (PMIC) and its subsidiary, Narragansett Bay Insurance Company (NBIC) into rehabilitation after finding that their financial condition was hazardous to their policyholders, creditors and/or the public. As a way to revitalize PMIC and NBIC, the Rehabilitator converted PMIC from a mutual company to a stock company. In order to facilitate the sale of the newly formed stock company, the Rehabilitator filed a petition to defer PMIC and NBIC payments of FAIR Plan assessments. The FAIR plans filed objections.
Relying on the broad statutory authority granted to the Rehabilitator to take steps necessary to revitalize an insurer, the court affirmed the decision to allow deferral of payments to the FAIR Plans. Marques v. Pawtucket Mutual Insurance Company, Case No. 2006-52-Appeal (R.I. Feb. 19, 2007).