The Receivership Process in New York – Part I: What exactly is the Liquidation Bureau anyway?

August 19, 2008

As promised in my last post, here is the first in a series of articles on the receivership process in New York: starting with a discussion of the liquidation bureau – what exactly is it?

It is easier to state what the liquidation bureau is not. According to the New York Court of Appeals, it is not a state agency (and therefore not subject to audit by the state comptroller). According to the records of the Secretary of State, it is not a corporation. And according to the Insurance Law . . . , well let’s just say its status is undefined.

As I stated in my last posting, before 1993 there were no statutory references to a liquidation bureau in the Insurance Law including the receivership article, Article 74. In 1993, subsection (g) was added to Section 7405 (Order of liquidation; rights and liabilities) requiring the superintendent as receiver to prepare an annual report on the status of each company in liquidation or rehabilitation. The last sentence of this new section states that “This report shall be separate and apart from other reports issued by the liquidation bureau of the department in the normal course of its business.” This is the only reference in the Insurance Law (actually the only reference in the entire New York Consolidated Laws) to a liquidation bureau.

The Bureau’s existence may be assumed, but its status and mandate are not defined anywhere in the law. The home page of the Liquidation Bureau’s web site states:

The New York Liquidation Bureau (NYLB) is a unique entity. [No debate there!] Receiving no funding from taxpayers, it carries out the responsibilities of the Superintendent of Insurance as Receiver, and acts on his behalf in the discharging of his statutorily defined duties to protect the interests of the policyholders and creditors of insurance companies that have been declared impaired or insolvent.

The bureau’s web site also states that it has “performed this function since 1909, when the New York State Legislature passed the law mandating that the Superintendent assume the separate responsibility of Receiver.” However, the law does not establish a bureau to carry out this function. The law requires that the superintendent be designated as rehabilitator or liquidator to take control of the assets of an insolvent company and liquidate or manage the estate. It also permits the appointment of deputies and assistants to support the superintendent in this role as receiver. It was clearly anticipated that these appointments would come from the key employees of the insolvent company itself — those with the greatest knowledge of the business and operations of the company being liquidated — and would be engaged only for the duration of the receivership process.

The hiring of employees of the insolvent company, and the temporary nature of these appointments, was succinctly summarized in a 1915 report to the New York State Constitutional Convention Commission on the Organization and Functions of the Government of the State of New York (at page 118) — just a few years after the statute referred to in the Bureau’s web site:

The practice is to retain such of the employees of each company which comes into liquidation as may be necessary to attend to the details of its affairs, and to dispense with them as rapidly as consistent with the proper conduct of its business.

The current statute is consistent with this historical record of the temporary nature of the receivership of insurance companies. Rather than authorizing the establishment of a permanent bureau, current Section 7422 authorizes the superintendent to appoint deputies and others to assist in the performance of the receivership function, “and all expenses of conducting any proceeding under this article shall be fixed by the superintendent, subject to the approval of the court, and shall be paid out of the funds or assets of such insurer.”

Article 74 clearly views each insolvency as a separate proceeding with the superintendent acting as receiver under the supervision and control of a Supreme Court judge for that estate. Nowhere in the law is there any provision for the establishment of a permanent agency or bureau to carry out this function, and there is no central judicial oversight designated to coordinate the handling of all pending receivership proceedings collectively.

The limited role and temporary nature of the agents assisting the receiver for a particular estate has evolved into a permanent liquidation bureau, particularly over the past thirty years. This evolution occurred without a statutory, judicial or regulatory mandate to do so. As the number and size of insolvencies increased dramatically in the late 1970s and into the 1980s, the liquidation bureau grew into its own self-operating permanent bureaucracy, flying under the radar and accountable to no one – not the legislature, not the courts, and not the regulators.

The Bureau today has half as many employees (over 450 employees) as the entire New York Insurance Department, and most of them are protected by union contracts. The Bureau also purports to have a budget of over $100 million, but this “budget” is not subject to any independent oversight. Although Section 7422 requires court approval of expenses for an estate, there is no requirement in the law – including the much touted new legislation that would require annual audits – that the supervising court be provided with any regular, interim financial or status report. More significantly, no one court would be looking at the bureau or its budget as a whole.

The current administration has made a lot of noise about reforming the bureau and making it more “transparent.” It is doing this, however, by making the bureau even more permanent contrary to the mandate of Article 74 and the statutory receivership scheme.

In my next posting in this series I will discuss a current example of how the system could and should work under the existing statutory authority. In subsequent postings I will also discuss the role and structure of the security funds and how they have helped perpetuate the liquidation bureau’s independence and freedom from oversight, and why the current administration’s reform efforts will not only fail to achieve the advertised accountability and transparency, but will in fact further fortify the bureau against substantive change while significantly increasing the cost to policyholders and creditors of insolvent companies.

What do you think?

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