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
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.
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 2) whether a federal court should abstain from
hearing and deciding such a claim.
Armco asserts that plaintiffs lack standing because their
alter ego claims are the exclusive property of the Liquidator.
Armco contends that liquidators will not be able to negotiate
settlements, and efficiently and fairly marshal and distribute
an insolvent insurer's assets, if creditors, such as
plaintiffs, are granted standing to bring alter ego actions
outside the liquidation proceedings.
In support of this argument, Armco offers the affidavit of
James Rishel, counsel to the Ohio Liquidator, to the effect
that the Liquidator had the exclusive right to pursue and to
release all veil piercing or alter ego claims against the
Armco Group arising from or relating to ADI and that Ohio law
vests all such claims in the Liquidator exclusively on behalf
of all creditors, members, policyholders and shareholders of
ADI. Rishel adds that the Liquidator did not intend, by
excluding creditor claims from release, to imply that any
creditor or policyholder held, or had the concurrent right to
assert, claims which the Liquidator released pursuant to the
Release and Agreement.
Armco cites several recent decisions in support of its
argument, including a decision where an insolvent debtor was
in federal bankruptcy, St. Paul Fire and Marine Ins. Co. v.
PepsiCo, Inc., 884 F.2d 688 (2d Cir. 1989) (applying federal
bankruptcy code and Ohio law), and decisions where the
insolvent debtor was an insurer in a liquidation proceeding:
under Illinois law, Central Nat'l Ins. Co. v. B-W
Transmissions, No. 88 C 928, 1989 WL 44335 (N.D.Ill. April 21,
1989), reh. denied, No. 88 C 928, 1990 WL 6830 (N.D.Ill.
January 10, 1990), Hartford Cas. Ins. Co. v. Borg-Warner Corp.,
No. 88 C 783 (N.D.Ill. April 17, 1989), reh. denied, No. 88 C
783, 1989 WL 95806 (N.D.Ill. August 11, 1989); and under New
York law, Corcoran v. Frank B. Hall & Co., 149 A.D.2d 165, 545
N YS.2d 278 (1st Dep't 1989).
In St. Paul, the Second Circuit Court of Appeals held that
alter ego claims are the property of the insolvent estate and
are not assertable by creditors outside the bankruptcy
proceeding. 884 F.2d at 703-05. The court found Ohio law to be
silent on this issue. Id. at 700-03. It decided that, under
Ohio law, an insolvent corporation would be able to assert an
alter ego claim against its parent corporation. Id. Finally,
the court concluded that individual creditors do not have
standing to sue the debtor's parent where the monetary recovery
would benefit all creditors, unless the trustee has abandoned
the claim. Id. at 700-05.
Central Nat'l Ins. Co. and Hartford Cas. Ins. Co. hold that
creditors cannot assert an alter ego claim against the parent
of an insolvent insurer where the injury for which redress is
sought is common to all creditors. The decisions interpret
Illinois law as providing that the Illinois Director of
Insurance has the sole authority to assert such claims.
In Frank B. Hall, defendants had argued that, under New York
law, a liquidator has authority to assert only the insolvent
insurer's claims, and not the insurer's creditors' claims,
except claims for voidable transfers and liens, which the
liquidator had explicit statutory authority to assert. 545
N YS.2d at 280. The court rejected defendants' argument. Id.
The court stated
that the liquidator had "paramount and exclusive" standing to
assert claims on behalf of the insolvent insurer, its
policyholders and creditors. Id. at 281-85. The court later
reasoned that it was unnecessary to decide whether the
liquidator had exclusive standing to assert creditors' claims,
since all of the claims asserted by the liquidator, including
an alter ego claim, belonged to the insolvent insurer, for
which the liquidator did have exclusive authority. Id. at
282-83. The court added that a creditor submits itself to the
exclusive jurisdiction of the liquidation court when it files a
proof of claim in liquidation. Id. at 282.
These decisions do not control this case. They do not
include a federal court decision that an alter ego*fn2 claim
is the exclusive property of a liquidator where there is
substantial evidence that the liquidation court intended that
creditors could assert such a claim. For this reason, and
others, these decisions are not persuasive. Furthermore, this
Court is only bound by the Second Circuit's decision in
St. Paul, which does not determine the resolution of the issue
before this Court, for the following reasons.
First, St. Paul is concerned with the standing of a creditor
of a debtor in federal bankruptcy, not in state liquidation.
The court considered federal bankruptcy law, as well as Ohio
law, in reaching its holding, and rests its decision primarily
on the former. 884 F.2d at 707. Only Ohio law is relevant here.
Second, in St. Paul, the court made it clear that Ohio law
was silent on the issue of whether alter ego claims are the
property of the estate. In this case, as discussed below, there
is evidence that the Ohio Liquidation Court did not consider
alter ego claims to be the sole property of the Liquidator.
Finally, and most important, is the fact that the court in
St. Paul did not face a question of whether to abstain. The
court decided an issue of state law in the context of a federal
bankruptcy proceeding. In St. Paul, the court was not asked to
defer to a state's unique interest in regulating insurance, as
this Court is now requested to do.
Armco contends that this court should abstain from
exercising jurisdiction in this case, under the
Burford doctrine*fn3, so as to avoid disrupting Ohio's
regulatory scheme for the liquidation of domestic insurers.
Armco acknowledges that federal courts have a fundamental
duty to exercise jurisdiction conferred. See Willcox v.
Consolidated Gas Co., 212 U.S. 19, 40, 29 S.Ct. 192, 195, 53
L.Ed. 382 (1909). This duty is rooted in the constitutional
principle that Congress, not the judiciary, defines the
jurisdiction of the federal courts, within constitutional
bounds. New Orleans Pub. Serv. v. Council of Neu, Orleans, ___
U.S. ___, 109 S.Ct. 2506, 2513, 105 L.Ed.2d 298 (1989). This
principle coexists with a federal court's discretion to abstain
from deciding certain types of disputes — a discretion founded
in the common law background against which Congress conferred
jurisdiction.*fn4 Id. Abstention is permissible, however, only
in carefully defined areas. Id.
Under the Burford doctrine, where timely and adequate state
court review is available, a federal court must not interfere
with state administrative proceedings:
(1) when there are `difficult questions of state
law bearing on policy problems of substantial
public import whose importance transcends the
result in the case at bar'; or (2) where the
`exercise of federal review of the question in a
case and in similar cases would be disruptive of
efforts to establish a coherent policy with
respect to a matter of substantial public
New Orleans Pub. Serv., 109 S.Ct. at 2514 (quoting Colorado
River Water Conserv. Dist. v. United States, 424 U.S. 800, 814,
96 S.Ct. 1236, 1244, 47 L.Ed.2d 483 (1976)). Federal review of
such state questions would lead to needless federal conflict
with state policy, misunderstanding of state law, and delay.
Burford v. Sun Oil Co., 319 U.S. 315, 327, 63 S.Ct. 1098, 1104,
87 L.Ed. 1424 (1943).
Abstention reflects a "complex of considerations designed to
soften the tensions inherent in a system that contemplates
parallel judicial processes." Pennzoil Co. v. Texaco, Inc.,
481 U.S. 1, 11 n. 9, 107 S.Ct. 1519, 1526 n. 9, 95 L.Ed.2d 1.
(1987). Federal courts must respect the rightful independence
of state governments to carry out their domestic policy. Di
Giovanni v. Camden Fire Ins. Ass'n, 296 U.S. 64, 73, 56 S.Ct.
1, 5, 80 L.Ed. 47 (1935). The right of states to administer
specialized schemes for liquidating certain business
enterprises has long been recognized as a ground for deference
by federal courts. Pennsylvania v. Williams, 294 U.S. 176,
182-86, 55 S.Ct. 380, 383-85, 79 L.Ed. 841 (1935).
Ohio has adopted a comprehensive regulatory scheme for the
rehabilitation and liquidation of insurers. See Ohio Rev.Code
Ann. §§ 3903.01-59 (Anderson 1989). Among its provisions, this
scheme provides that the liquidator is vested with title to all
of the property, contracts and rights of action of the insurer,
and may collect all debts, moneys due and claims belonging to
the insurer. §§ 3903.18(A), .21(A)(5). The liquidator
determines the validity of claims against the estate, and
distributes the estate's assets according to a statutory
schedule of priorities. §§ 3903.39, .42. Furthermore, this
scheme provides that an Ohio court has jurisdiction to hear all
authorized liquidation actions. § 3903.04(E).
Ohio's effort to establish a coherent public policy for the
liquidation of insolvent insurers is further reflected in the
stated statutory purpose for its regulatory scheme. Section
3903.02 provides in part:
(D) The [scheme's] purpose is the protection of
the interests of insureds, claimants, creditors,
and the public generally, . . . through all of
(3) Enhanced efficiency and economy of
liquidation, through clarification of the law, to
minimize legal uncertainty and litigation;
(4) Equitable apportionment of any unavoidable
(5) Lessening the problems of interstate
rehabilitation and liquidation by facilitating
cooperation between states in the liquidation
process, and by extending the scope of personal
jurisdiction over debtors of the insurer outside
(6) Regulation of the insurance business by the
impact of the law relating to delinquency
procedures and substantive rules on the entire
In addition to Ohio's enactment of a comprehensive
regulatory scheme, the subject matter of the scheme and of
this litigation is well recognized as an area in which states
have a special interest. For over seventy-five years, from
Paul v. Virginia, 8 Wall. 168, 19 L.Ed. 357 (1868), to United
States v. South-Eastern Underwriters Ass'n,