all motions were heard on July 6 and considered submitted at that time.
In order to be eligible for the placement of insurance business by excess line brokers licensed in the State of New York, LARSA, an unauthorized insurer within the meaning of the New York Insurance Law, established the Trust pursuant to New York State Insurance Department Regulation No. 41, 11 NYCRR 27.5 ("Regulation 41"). This Regulation 41 Trust established by LARSA with Citibank was terminated on or about December 23, 1990, and subsequently an independent auditor's report found there to be total outstanding liability to United States policyholders in the amount of $ 523,041.65.
The Trust Agreement dated January 31, 1978, as amended on February 25, 1981 between LARSA and Citibank (the "Trust Agreement"), provided, among other things, for the establishment of the Trust. The Trust was funded by a letter of credit in the amount of $ 1,500,000 issued by Chase Manhattan Bank (the "Trust Property" or "Trust Fund"). The Trust Property was maintained by Citibank pursuant to the terms of the Trust Agreement until December 23, 1990, the date the Trust Agreement expired. Thereafter, Citibank retained and continues to retain the Trust Property as a fiduciary, in accordance with New York law and at the direction of the Department as representative of all potential beneficiaries under the Trust Agreement, until the conditions for release of the Trust Property are fulfilled.
The claims asserted in the Interpleader, in the aggregate, exceed the value of available funds, which as of March 8, 1994 totalled $ 1,500,000 in principal and $ 87,884.49 in interest. Due to the length of time that has passed since the 1990 audit, a current audit is being performed so that the current status of LARSA's outstanding liabilities can be determined.
In 1984 and 1985, LARSA and Hannover entered into certain reinsurance contracts. LARSA's obligations to Hannover were secured by a letter of credit issued by Cafetero. The performance of the agreements with Hannover became the subject of a dispute which resulted in the initiation of the this action in which Hannover sought a recovery of over $ 2 million. Hannover also initiated an action against Cafetero in the Central District of California to require payment of its letter of credit.
On April 6, 1990, LARSA went into statutory reorganization proceedings in Panama under the protection of NCR.
The audit report required by the regulations of the Department was initially prepared by Peat, Marwick & Mitchell on or about January 28, 1991 and was delivered to Citibank and the Department on or about February 1, 1991. The audit report, inter alia, disclosed that LARSA has liabilities in the United States which may result in multiple claims against the Trust Property, including potential liabilities for claims on direct insurance business underwritten by LARSA in the United States in the amount of $ 440,114.12 and losses of $ 82,927.53, for a total of $ 523,041.65 (collectively referred to herein as the "Reserve Amount"). Because of challenges to the initial audit, a revised audit has now been undertaken by Horwath & Co. However, it is not anticipated that the results in gross amount will differ materially from the earlier audit.
On November 18, 1991, LARSA filed an ancillary proceeding in the United States Bankruptcy Court for the Southern District of New York pursuant to § 304 of Title 11 of the United States Code (the "Bankruptcy Code"). Pursuant to § 304(b)(1) of the Bankruptcy Code, the Bankruptcy Court issued a preliminary injunction staying Hannover's prosecution of both of the above-described federal court actions. On February 17, 1993, Judge Leval in In re Ocana, 151 Bankr. 670, S.D.N.Y. 1993, on appeal, issued a decision reversing the preliminary injunction imposed by the Bankruptcy Court. In vacating the order of the Bankruptcy Court staying Hannover's action against Cafetero, Judge Leval stated: "It seems clear that the reversionary right is properly subject to control by LARSA's bankruptcy court." (p. 675).
On June 11, 1993, Hannover, LARSA and Cafetero agreed to resolve the outstanding litigation between them by entering into two settlement agreements. Pursuant to the first settlement agreement (the "First Settlement Agreement"), the three parties agreed that Hannover would be paid $ 2.3 million and that the pending actions against Cafetero and LARSA would be dismissed with prejudice.
In the second settlement agreement (the "Second Settlement Agreement"), LARSA and Cafetero agreed that Cafetero would be indemnified by LARSA in the amount of $ 1 million in connection with payments Cafetero made to Hannover pursuant to the First Settlement Agreement, and that LARSA would pay Cafetero the indemnity amount plus 7.5% interest per annum and pledge as collateral its reversionary interest in the sums on deposit at Citibank that constitute the Trust Property.
Pursuant to the First Settlement Agreement and the Second Settlement Agreement (collectively, the "Settlement Agreements"), Cafetero paid Hannover $ 1 million. LARSA on July 20, 1993 wrote to Citibank directing that Cafetero be reimbursed from the Trust Property.
The General Release executed by Hannover in favor of LARSA, dated June 16, 1993, states as follows:
Releasor covenants and agrees with and warrants to Releasee that Releasor releases and waives any claim it may have as a policyholder or intended beneficiary against the New York Trust Fund which is the subject matter of Case No. 90 CV 7734 (PNL) in the United States District Court for the Southern District of New York, and Releasor will never institute, prosecute, or assert, or . . . aid in the institution, prosecution, or assertion against Releasee or anyone claiming by, through, or under Releasee, or any of Releasee's agents, attorneys, or employees, of any claim, suit, action or defense at law or otherwise, known or unknown, on account of any act, matter, cause, or thing whatsoever from the beginning of time to the date hereof.
On July 7, 1993, pursuant to Article 57 of Law 56 of December 20, 1984 of the Republic of Panama, NCR deemed the reorganization of LARSA terminated and, pursuant to Panamanian law, took possession of LARSA's holdings and assumed administration of all of its assets. On August 4, 1993, NCR requested a judicial order from the Panamanian Courts for the forced liquidation of LARSA.
Robinson Brog has rendered services as local counsel in connection with the commencement of the § 304 ancillary proceeding, a hearing held before the Bankruptcy Court in connection with the § 304 proceeding, and responding to Hannover's appeal of the Bankruptcy Orders. As a consequence, Robinson Brog was owed the sum of $ 13,111.50 for services and $ 3,207.34 for disbursements and expenses. On July 16, 1993, Robinson Brog filed a petition (the "Petition"), seeking an order enforcing an attorney's lien arising pursuant to Judiciary Law § 475 and enforcing such lien against the Trust Fund currently being held by Citibank.
On July 22, 1993, in connection with the Petition, which was unopposed, Judge Leval signed an order (the "Order") provisionally granting Robinson Brog an attorneys' lien in the amount of $ 16,318.34, for services rendered as local counsel for LARSA. The Order further provided that "upon disbursement of the proceeds currently in the Trust Fund, Citibank, N.A. shall be required to retain the sum of $ 16,318.84 which may be used on further order of this Court to satisfy the lien of Robinson Brog."
In September 1992, MIH had been retained by LARSA to assist it in negotiating the settlement of the litigation between LARSA and Hannover and Cafetero at the agreed rate of $ 165 per hour, to be billed monthly. Until May 1993, MIH received payment for each invoice within thirty (30) to sixty (60) days of the date of any such invoice, without objections.
The intensity of the representation of LARSA increased in May of 1993 and the settlement agreement between LARSA and Cafetero was drafted and initialled by counsel for Cafetero and LARSA on June 13, 1993. Duly authorized representatives of LARSA and Cafetero executed the settlement agreement in Panama shortly thereafter.
The statements issued by MIH for work performed during May 1993 and June 1993 were not paid prior to the reintervention of LARSA by the Panamanian government in July 1993, nor have they been paid since.
Dunshaw held a promissory note of LARSA in the amount of $ 500,000, dated October 7, 1991. Laurencio Jaen Ocana executed the note on behalf of LARSA and was also the president of Dunshaw. The Note provided as follows:
The Promissory Note shall be governed by, and construed in accordance with, the laws of the Republic of Panama. Exclusive venue for all disputes related to this Note, shall be Panama City, Republic of Panama. Amounts due upon this note are not effected by any other contract disputes between Maker and Holder except as set forth [elsewhere in the Note].
A financing statement (UCC) was filed with the County Clerk of New York County on June 16, 1993 and with the Department of State of the State of New York the following day. On January 20, 1994 Dunshaw obtained a judgment, denominated in Panamanian currency, of B425,374.16 (roughly equivalent to US $ 425,000 at 1993 exchange rates, see The World Almanac 798 (1994)) from the Second Judicature of Civil Court of the First Judicial Circuit of Panama.
The Motions to Intervene Are Granted
MIH, Robinson Brog and Dunshaw have sought to intervene to assert their claims against the Trust Fund. No opposition to the intervention has been filed, as distinct from the merits of the asserted claims. The motions to intervene are therefore granted.
Cafetero Is Not Entitled to the Trust Fund but is Entitled to Summary Judgment
Prior to the settlement of the claim against LARSA, the parties disputed whether or not Hannover was a "policyholder" pursuant to the terms of the Trust Agreement under which Citibank held funds belonging to LARSA. That issue was not resolved in the course of the settlement.
The General Release executed by Hannover, as Releasor, in favor of LARSA, as Releasee, dated June 16, 1993, as quoted above released any claim Hannover had.
As set forth above, Cafetero advanced $ 1,000,000 on behalf of LARSA to Hannover in connection with the settlement. In order to guarantee to Cafetero the reimbursement of said advance, LARSA agreed to deliver to Cafetero an indemnity collateralized by the Trust for up to $ 1,000,000 plus interest accrued thereon.
The Trust Agreement sets forth four conditions which must be complied with in order for a claim to be perfected against the Trust Fund assets. These four conditions are summarized below:
1. A judgment must be obtained by a policyholder against LARSA;