" title="Peter H. Bickford Legal & Dispute Resolution Services"> Peter H. Bickford Legal & Dispute Resolution Services

The New York Freedom of Information Law (Article 6 of the New York Public Officers Law) is a wonderful tool, and the New York Court of Appeals recently made the tool even more useful!

Government Agencies are required to make their records available to any citizen upon request, with a few exceptions. One exception is a privacy exemption allowing an agency to deny access to records that “if disclosed would constitute an unwarranted invasion of personal privacy.” Earlier in December the Court of Appeals issued a decision that held that the burden of demonstrating that the privacy exemption applies is on the agency, not the requesting party (In the Matter of Data Tree, LLC v. Edward P. Romaine, & Co., December 18, 2007, Court of Appeals No. 2007/173, http://www.nycourts.gov/ctapps/decisions/dec07/dec07.htm ). The Court of Appeals also found that generally “FOIL does not require the party requesting the information to show any particular need or purpose”, although the Court noted that “motive or purpose is not always irrelevant”, such as where it involves an “unwarranted invasion of personal privacy” or to obtain lists of names and addresses to be used for “commercial or fund-raising purposes” (p.7).

These findings are not the most interesting aspect of the case, however. The most interesting finding – at least to those of us who have been denied access to information for this very reason — is that reformatting electronic data to meet a specific request is not necessarily the creation of a new record. Acknowledging that “an agency is not required to create records in order to comply with a FOIL request”, the Court of Appeals nevertheless concludes:

“As stated earlier, the term ‘records’ means, among other things, ‘computer tapes or discs.’ Disclosure of records is not always necessarily made by the printing out of information on paper, but may require duplicating data to another storage medium, such as a compact disc. [Footnote omitted] Thus, if the records are maintained electronically by an agency and are retrievable with reasonable effort, that agency is required to disclose the information. “(p.9) . . . “A simple manipulation of the computer necessary to transfer existing records should not, if it does not involve significant time or expense, be treated as creation of a new document. “(p.10) (Emphasis Added).

Although the decision leaves room for an agency to argue time and expense, the New York Court of Appeals has clearly issued the message that the burden will be on the agency to justify a denial of access to government records.

Halleluiah and Happy New Year!

This is an update to last week’s posting (see December 5, 2007 posting below) about Executive Life Insurance Company of New York (ELNY). I expect to continue issuing postings on this topic to raise questions about the premises behind the New York Liquidation Bureau’s bail out plan for ELNY so long as the Bureau continues to publicly tout its plan using justifications that are contrary to the facts.

This week’s issue of Business Insurance (http://www.bi.com/) published a follow-up article on the ELNY deal reporting on statements by the head of the Liquidation Bureau, Mark Peters. According to the article, “ELNY would receive roughly $650 million to $750 million in cash contributions” from both state life guarantee associations and from certain p/c companies “that bought ELNY annuities to fund structured settlements of liability claims.” The p/c companies include Allianz, Fireman’s Fund, Allstate, State Farm and Travelers.

The article goes on to state: “The contributions will be enough to offset the $2 billion deficit that ELNY is predicted to face in 12 to 15 years, regulators say. The deficit results largely from an overly optimistic assumption in ELNY’s 1992 rehabilitation plan that the estate would earn 10% annually on its invested assets, Mr. Peters said. The actual return was between 7% and 8%. The Liquidation Bureau is now assuming a future annual return of just over 6%, he said. Most of ELNY’s contracts will run off within 35 years, with the last contract expiring in about 70 years, he said.”

Let’s see what’s wrong with the foregoing statements:

Inadequate interest rate assumptions cannot begin to account for the purported deficit. The assets simply have not decreased substantially in the past 16 years. In fact, prior to 2002, there was NO reduction in reported assets – all policy claims were being paid from current earnings.

The 1992 plan of rehabilitation does not include interest rate assumptions. It discussed an investment strategy summarized as follows: “. . . principal and interest realized upon maturity or recovery of ELNY’s bonds [none of which defaulted, by the way], as well as other cash flows derived from investments contained in ELNY’s portfolio, will be reinvested in long-term (thirty (30) year) investment grade corporate bonds and in Standard and Poor’s 500 common stocks. The reinvestment in common stocks will be limited.”

The 1992 plan of rehabilitation specifically stated that that the cash flows from investments “are projected to be sufficient to cover current [covered annuity] payouts for at least ten (10) years.” That is what happened. So how was the strategy wrong?

By the beginning of 2002 the number of outstanding contracts had already declined by over 40% (now over 50%), yet the asset base remained constant. Over-stated interest assumptions simply cannot explain the Bureau’s publicly announced conclusions.

So if it is not the interest rate assumptions causing the purported deficit, what is causing it? Potential investors have made proposals to the Liquidation Bureau over the past several years supported by pro forma statements using interest rate assumptions at or below the Bureau’s current assumption without showing any significant deterioration based on known liabilities. These investment proposals all failed to obtain the Bureau’s “approval” because of continual increases in liabilities – not because of a decline in the assets. This precipitous increase in liabilities – which is not mentioned at all in the Bureau’s statements about ELNY — is counter-intuitive to the conservative actuarial assumptions in place for the life of the estate, the nature of the business, and the decline by half in the number of active policies.

A couple of other points are also worthy of note. It is interesting that this publicly touted agreement with the industry is not publicly available, and all the participants are unable to discuss the agreement because they were each required to enter into a confidentiality agreement with the Bureau. If the bail out plan is so beneficial for everyone, why does the Bureau feel compelled to keep it hidden?

In the Business Insurance article, Mr. Peters also stated that the bail-out plan “would be cheaper for the insurers [how this is so is not explained] and avoids the ‘chaos’ that would come with a liquidation.” One thing that liquidation accomplishes is to remove the company from the hands of the people that caused it to become insolvent. Because ELNY was solvent when it was placed in rehabilitation, if it is now insolvent it became insolvent under the Liquidation Bureau’s watch. Can anyone imagine the industry voluntarily contributing $750 million to bail out a company’s management so that it could avoid liquidation and remain in charge?

New York’s Governor Spitzer issued a press release on Monday (December 3) followed by a widely reported press conference announcing an agreement in principle “that will protect nearly 11,000 accident victims and other individuals receiving annual payments from structured settlements and pensions.” The release goes on to praise the Superintendent of Insurance and the head of the Liquidation Bureau for aggressively pursuing an agreement with the life and property/casualty companies and the guarantee funds that “resolved a significant deficit from a defunct insurance company.” (The press release can be found on the Insurance Department’s web site at http://ins.state.ny.us/press/2007/)

Before jumping on the bandwagon of kudos to the Governor, the Superintendent of Insurance and the Liquidation Bureau, however, there are a number of factual issues that one might want to consider.

The “defunct” company in question is Executive Life Insurance Company of New York (“ELNY”), which was placed into rehabilitation in 1991. According to the 1992 court approved Plan of Rehabilitation, ELNY was placed in rehabilitation because of the New York Insurance Department’s concerns that the adverse publicity regarding the seizure of its parent company, Executive Life Insurance Company of California, could result in an excessive number of cash surrenders. It was NOT placed in rehabilitation because it was insolvent! In fact, ELNY has never been determined to be insolvent. Consider also the following:

• At year-end 1994 (the first year the Liquidation Bureau was required to publish financials for the estates under its control), ELNY had almost 24,000 annuity contracts in force and reported assets of $1.65 billion.
• At year-end 2006, there were only 11,300 policies in force and reported assets of $1.37 billion – a 53% decline in outstanding policies and only a 17% decline in assets.
• In that 13 year period 1994 through 2006, ELNY continuously met all outstanding policy obligations to the tune of almost $2 billion.
• Throughout that same period, ELNY had the same major life insurer as administrator, the same nationally known actuarial firm as its actuarial consultant, and the same prominent financial firm as investment advisor.
• Over 90% of the outstanding obligations are fixed obligations under structured settlement agreements. There are no potential “long tail” obligations to cause a sudden and precipitous inflation of ultimate liabilities.

Notwithstanding these facts, the current administration has apparently “sold” the industry and the life guarantee funds on the premise that “ELNY would have a $2 billion deficit,” that continued payments to policyholders is at risk, and that an industry bail out is necessary and appropriate (Announcing a $2 billion deficit at this time is also curious in view of the fact that the Liquidation Bureau has engaged an audit of ELNY that is not expected to be completed until the middle or end of January 2008).

If there is in fact a $2 billion shortfall the big question is: How did it happen? It cannot be blamed on the former management of ELNY because the company was solvent when it was placed in rehabilitation. It has been under the Liquidation Bureau’s watch with the same prestigious advisors for over 16 years – through both Democratic and Republican administrations — paying all obligations on a timely basis, and has received a number of investment suitors that have all been rejected by the Bureau.

Now we are being told that there is a $2 billion shortfall that can only be resolved on the backs of the industry. If true, someone needs to explain how that happened and hold those responsible accountable. Given the prosecutorial background of the Governor, his Superintendent of Insurance and the head of the Liquidation Bureau, can we assume that as bright a light will be aimed at the causes of this development as is being shined on the bailout agreement?

(In the interest of full disclosure, I have represented various investor groups over the past ten years interested in restoring ELNY to the marketplace. I do not represent any such group at this time, however, although I am aware of continued investor interest based primarily on the belief that any significant deficit defies fact and logic.)