Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

AMERICAN CENTENNIAL INS. CO. v. ARMCO

September 11, 1990

AMERICAN CENTENNIAL INSURANCE COMPANY, PLAINTIFF,
v.
ARMCO INC., DEFENDANT. THE BURT SYNDICATE, INC., PLAINTIFF, V. ARMCO INC., DEFENDANT.



The opinion of the court was delivered by: McKENNA, District Judge.

Defendant moves pursuant to Articles III and IV of the United States Constitution and Fed.R.Civ.P. 12(b)(1) for an order dismissing the claims in these actions for lack of subject matter jurisdiction*fn1, or alternatively, staying or dismissing these actions on abstention grounds. Defendant's motion requires the Court to resolve a conflict between the fundamental obligation to exercise federal jurisdiction and the unique responsibility of the several states to regulate the pooling of risks.

The Court concludes that it must defer to Ohio's interest in providing for the equitable liquidation of a domestic insurer. Abstention is appropriate so that an Ohio court, rather than a federal forum, can decide and define the comparative rights of an insolvent Ohio insurer, its parent and its creditors. Defendant's motion is granted to this extent only, and otherwise denied.

BACKGROUND

Defendant Armco Inc. ("Armco") owns the American Druggists' Insurance Co. ("ADI"). ADI allegedly owes plaintiffs American Centennial Insurance Company ("American") and The Burt Syndicate, Inc. ("Burt") more than $2.2 and $1.2 million respectively for its share of outstanding losses on various reinsurance agreements. American and Burt bring declaratory judgment actions to hold Armco liable for these outstanding debts of ADI on the theory that Armco's acts rendered ADI its alter ego. Plaintiffs allege that Armco has abused the corporate privilege by operating and controlling ADI for its own self-interest and profit.

ADI is incorporated under Ohio law as a stock fire insurance company. In April, 1986, ADI was adjudged insolvent and voluntarily placed into liquidation by the Court of Common Pleas of Franklin County, Ohio ("Liquidation Court"). The Liquidation Court appointed and authorized a liquidator, George Fabe ("Liquidator"), Ohio's Superintendent of Insurance, to marshal and distribute ADI's assets and to pursue actions on behalf of ADI and its creditors, policyholders, shareholders and members against any person. Shortly thereafter, creditors of ADI began filing claims with the Liquidator against ADI's assets. Plaintiffs filed claims for the losses at issue in this litigation.

The Liquidator subsequently entered into settlement discussions with Armco and its subsidiaries. The Liquidator sought to obtain a substantial payment by Armco into ADI's estate.

In June, 1986, the Liquidator moved the Liquidation Court to approve a proposed settlement agreement ("Proposal") with Armco. The Proposal sought to release all claims which the Liquidator had authority to bring on his own behalf, and on behalf of ADI, its creditors, policyholders, shareholders and members against Armco, its subsidiaries, and their past and present officers, directors, employees, agents and other representatives ("Armco Group"). In consideration, Armco agreed to accelerate total payment on a $6 million note held by ADI, pay $3.2 million owed to ADI by other Armco subsidiaries, and contribute an additional $1.8 million to ADI's estate. Armco also agreed to transfer all its ADI stock to the Liquidator upon demand. The motion, opposed by various creditors of ADI, was assigned to a referee, Harold Paddock (the "Referee").

The Referee held a hearing on two issues: the authority of the Liquidator to enter into such a settlement, and whether the Liquidation Court should approve the Proposal. The Referee then recommended to the Liquidation Court that the Proposal be disapproved.

In recommending disapproval, the Referee made the following findings of fact and conclusions of law. ADI's total deficit was originally estimated at between $26 million and $48 million. The Liquidator made an initial demand on Armco of $27 million, which Armco rejected. The Ohio Department of Insurance then recomputed ADI's deficit at $18 million, which was demanded and rejected. Armco contended that it neither could nor would pay $18 million into the liquidation estate of ADI because of difficult economic times in the oil and steel industries. The Proposal was then reached.

The Referee found that the Liquidator's objective in agreeing to this settlement with Armco was to compensate "class 3 creditors." The Liquidator considered reinsureds, such as plaintiffs, to be "class 4 creditors," for whom "there was only a slight expectation . . . [of] some small distribution" from the ADI estate. In deciding whether to sue or accept Armco's "`take it or leave it'" offer, the Liquidator chose not to risk payment to "class 3 creditors" of ADI.

The Referee was particularly concerned that the "negotiations" with Armco were, in fact, a "one-sided auction," with the Liquidator reducing its demand each time Armco threatened to pay nothing into the ADI estate. The Referee stated, "[w]hile negotiation and agreement must, of course, be mutual to be effective and binding, it seems as if Armco set its own price to walk away from ADI with no further obligation to anyone."

The Referee concluded that a liquidator cannot release a creditor's right against a third party not under the liquidation order, such as the parent of an insolvent insurance company. The Referee noted that the issue was one of first impression. He then concluded that a prima facie case existed that ADI did not have a corporate existence separate from Armco. He stated, "[t]he wheelings and dealings of Armco make it appear that ADI became a mere shell dominated by other companies in the Armco insurance group."

Finally, the Referee presented the Liquidator and Armco with two options. The Referee stated, "[i]f the liquidator is to truly protect the interest of all creditors of ADI, it must either drive a harder bargain than it did regarding Armco's payment into the estate or settle with Armco without destroying the right of ADI creditors to pursue independent claims against a purported wrongdoer, namely Armco." The Referee recommended to the Liquidation Court that it disapprove the Proposal unless the Liquidator corrected one of these two deficiencies.

The Liquidator objected to the Referee's findings and conclusions, but the Liquidation Court overruled these objections. The Liquidation Court agreed with the Referee's findings of fact and conclusions of law, which it adopted in disapproving the Proposal.

The Liquidator and Armco then reached an amended settlement agreement ("Release and Agreement"). Armco's financial contribution to the liquidation estate was to be the same as in the Proposal. However, the Release and Agreement specifically excluded from release "[c]laims of creditors and policyholders of ADI against members of the Armco Group arising from or relating to ADU."

The Liquidator subsequently moved the Liquidation Court for approval of the Release and Agreement. In so doing, the Liquidator, by his counsel James Rishel, stated:

  The Liquidator and Armco have focused their
  discussions upon restructuring the agreement and
  the language of the release so that any claims
  which the creditors and the policyholders of ADI
  might make against members of the Armco Group
  arising from or relating to ADI are not released
  by the Liquidator. In essence, the Liquidator and
  Armco have followed the recommendation of Referee
  Paddock and the order of this Court in
  restructuring the settlement.
  The Liquidator and Armco have agreed to a
  restructured settlement whereby only the claims
  which the Liquidator could pursue in his own
  right or on behalf of ADI will be released.

The Referee recommended approval of the Release and Agreement, the parties having followed his earlier recommendation. The Referee concluded, "[t]he Release to be executed by the Liquidator in accordance with the terms of the Release and Agreement does not release the alleged claims which the creditors and policy-holders of ADI might make against members of the Armco Group arising from or relating to ADU."

The Liquidation Court subsequently approved the Release and Agreement, while adopting the Referee's findings and conclusions. Plaintiffs then filed the present actions against Armco. ADI is still in liquidation.

DISCUSSION

Armco asserts several arguments in support of its motion. The Court's decision requires that only two of the issues raised need discussion: 1) whether, under Ohio law, an alter ego claim is assertable, outside the liquidation proceeding, by a creditor of an insolvent insurer against the insurer's parent; and ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.