Judicial Authority in Liquidation Proceedings

February 21, 2008

Like an old prospector, it is always a thrill to find a small but valuable nugget in a large pile of rocks. In this case, the large pile of rocks is the 27 page decision of New York Supreme Court Justice Michael D. Stallman in a January 14, 2008 decision In the Matter of the Liquidation of Midland Insurance Company (printed in the New York Law Journal on February 14, 2008).

The case centered around motions by a reinsurer of Midland, Everest Reinsurance Company, seeking to lift the standard injunction barring suits against the Liquidator alleging that “the procedures of the New York Liquidation Bureau in handling, determining, and settling insurance claims violates provisions of the reinsurance contracts between Midland and Everest.” (Decision at p.1) The provisions Everest alleged were violated by the Liquidator’s agents included “(1) notice of a claim to Everest; (2) an opportunity to associate with Midland and to cooperate in the defense and control of any claim which may involve Everest’s reinsurance; (3) access to Midland’s books and records; (4) a right to investigate; and (5) a right to interpose defenses in the Midland liquidation (interposition rights).” (Decision at p.11)

Most of this very thorough decision was consumed by a point by point rejection of each of Everest’s claims, either because Everest failed to show any substantive evidence of error by the Liquidator’s agents, the remedy for any shortcomings existed within the framework of the existing liquidation process, or the issue had not risen to the point of a breach. The decision also strongly supported the Liquidator’s “clear, exclusive fiduciary powers over handling claims” (Decision at p. 20) and the exclusivity of the liquidation court in denying Everest’s motion for leave to sue. It seemed like a substantial sweep for the Liquidator and a complete loss for Everest. Then came the nugget!

Although the Court strongly supported the Liquidator’s control over the handling of claims, it did not dismiss the interposition rights of reinsurers. In seeking a balance between the control of the claim process by the Liquidator and the exercise of the interposition rights of reinsurers, the Court stated: “Thus, the only logical approach is to permit Everest and other reinsurers to exercise their contractual interposition rights after the Liquidator has allowed a claim, but prior to the Court’s approval of a claim.” (Decision at p. 22). The problem was that there was an earlier Court order on claims allowance procedures for Court approval that, in Justice Stallman’s view, conflicted with the reinsurers’ interposition rights.

“To give effect to the contractual interposition rights of Everest (and of other similarly situated reinsurers), this Court is constrained to modify the procedures for judicial approval of allowed claims, to permit reinsurers to assert defenses available to Midland or to the Liquidator to any claim allowed by the Liquidator which is either partially or wholly reinsured, and to establish a process in which those defenses can be adjudicated as part of the judicial approval process, involving a hearing before a referee equivalent to that provided where an objection is filed to the Liquidator’s disallowance of a claim. Otherwise, the Liquidator is placed in a position where compliance with [the prior] order could result in a violation of Midland’s reinsurance
contracts, jeopardizing reinsurance recovery.” (Decision at p. 24)

Therefore Justice Stallman, on his own volition, ordered a revision of the prior claim allowance procedures invoking his broad supervisory powers under the liquidation Article of the New York Insurance law!

“Thus, pursuant to its supervisory powers under Insurance Law § 7419(b), the Court directs the Liquidator to review the claims allowance procedures and to formulate changes to the claims allowance procedures and protocols of the Liquidation Bureau. The Liquidator shall report to the Court within 120 days with proposed changes.” (Decision at p. 24)

After more than twenty years of involvement in insurance receivership proceedings in New York, I can confirm the rarity indeed for a liquidation court to actually exercise its supervisory powers on its own volition. Others can dissect the holdings of the decision on the motions by Everest, the authority of the Liquidator, the rights of the reinsurers and policyholders; and others can speculate on the prospects for appeals by the Liquidator or Everest. I will enjoy the moment of a judge actually taking the time to consider the process beyond the four corners of the motions before him to exercise his authority for the benefit of the process as a whole.

(If you cannot find a copy of Justice Stallman’s decision and would like one, e-mail me at pbickford@pbnylaw.com)

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