Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Official citation and/or docket number and footnotes (if any) for this case available with purchase.

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

IN RE RELIANCE GROUP HOLDINGS

United States District Court, S.D. New York


April 30, 2004.

In re RELIANCE GROUP HOLDINGS, INC. SECURITIES LITIGATION

The opinion of the court was delivered by: THOMAS GRIESA, Senior District Judge

OPINION

This is a securities class action brought against Reliance Group Holdings ("RGH") and certain officers and directors of RGH. Plaintiffs are persons who between February 8, 1999 and December 6, 2000 purchased certain RGH securities. Defendant RGH is a holding company whose principal business is ownership of subsidiaries including Reliance Insurance Company ("RIC") and Reliance Financial Services Corporation ("RFSC").*fn1 The three individual defendants named in the case are former directors and officers of RGH and RIC. Joined as defendants for purposes of the motions currently before the Court are Syndicate 1212 at Lloyd's, London and other underwriters of certain insurance policies held by RGH, its directors and officers, and other entities ("the Underwriters"). M. Diane Koken, Insurance Commissioner of the Commonwealth of Pennsylvania, in her official capacity as Statutory Liquidator of RIC, has been permitted to intervene in the action. The action has been in a settlement posture since May 2001, when the parties to it entered into a Memorandum of Understanding ("MOU") outlining the terms for a contemplated settlement. At the same time that the parties entered into the MOU, defendants and the Underwriters entered into a Funding Agreement in which the Underwriters agreed to fund the contemplated settlement from the proceeds of certain policies that insured the defendants. These agreements are the subject of the motions now before the Court.

Plaintiffs move to enforce the MOU and the Funding Agreement. The Underwriters oppose plaintiffs' motion on the ground that the insurance policies are assets of the RIC estate, and that therefore the MOU and the Funding Agreement are now subject to the approval of Koken and the Commonwealth Court. Koken moves to dismiss or stay plaintiffs' motion.

  For the reasons set forth below, plaintiffs' motion is granted, and Koken's motion is denied.

  FACTS

  The following facts are taken from the pleadings and the affidavits submitted on the motions.

  The action was filed June 22, 2000, and alleges that between February 8, 1999 and December 6, 2000 RGH and the individual defendants made false and misleading statements regarding the financial status of RGH, causing the company's stock price to be artificially inflated.

  On May 29, 2001 the parties entered into the MOU. The MOU provides that defendants "shall cause their insurance carriers" to pay to the plaintiff class a $17.4 million settlement in two installments: $100,000 to be paid into an account upon execution of a stipulation of settlement, and the remaining amount to be paid within seven business days of the effective date of settlement (para. 2). Following execution of the MOU, plaintiffs' counsel was required to file an amended class action complaint. Subsequently, upon filing a stipulation of settlement, the parties were to submit to the Court a proposed order certifying a settlement class (paras. 1 and 3). Upon execution of the stipulation of settlement, the parties were to apply "promptly" for preliminary approval of the settlement, and the parties were to "use their best efforts to obtain final Court approval of the settlement" (para. 8). The MOU also states that "a condition precedent to this Settlement" would be dismissal or final approval of settlement of a pending derivative action in New York state court against RGH directors and officers, Leibowitz, et al. v. Steinberg, et al., No. 9869/00 ("the Leibowitz action") (para. 8).

  The separately executed Funding Agreement was entered into by RGH, on behalf of itself and the individual defendants, and the Underwriters, on the same day as the MOU. It provides that the Underwriters would fund the $17.4 million settlement with the proceeds of certain insurance policies held by RGH. The Funding Agreement states that the Underwriters "have consented to the terms and conditions of the settlement resolving the Shareholder and Bondholder Action . . . as set forth in the Memorandum of Understanding," and that the Underwriters "agree and commit" to, among other things, fund the settlement in the two installment amounts specified in the MOU.

  In addition to the above provisions, the MOU addresses the eventuality of a bankruptcy petition being filed by or against RGH prior to approval of the settlement. This provision provides that

Reliance shall move expeditiously for approval by the bankruptcy court in which the Reliance bankruptcy is pending of (a) the Stipulation of Settlement and (b) the Settlement Funding and Release Agreement dated May 29, 2001 between the Defendants and the Underwriters . . . The parties shall use their best efforts to obtain bankruptcy court approval of both (a) and (b) of this paragraph 4, and bankruptcy court approval of each will be conditions precedent to the Settlement.
(Para. 4).

  Finally, the MOU provides that "all applications to the Court with respect to any aspect of this Settlement" shall be presented and determined by the court where the Reliance Securities Class Action was brought, i.e., this Court (para. 7).

  Plaintiffs subsequently filed a consolidated amended class action complaint on July 16, 2001. Due to factors that will be explained in greater detail below, this is the only step that has been taken by any party to the MOU to carry out the agreed-upon procedures for effectuating the contemplated settlement.

  It is necessary to describe in some detail the terms of the insurance policies relevant to the MOU and the Funding Agreement.

  There are five separate insurance policies issued by the Underwriters to RGH, which in aggregate provide $125 million in insurance coverage for RGH and its subsidiaries, as well as for directors and officers of the same. Four policies are characterized as "blended" policies, so named because each of the four policies actually consists of four separate categories of coverage: director, officer, and company liability coverage ("D&O coverage"), errors and omissions coverage, fiduciary liability coverage, and employment practices coverage.

  With respect to these four policies, the policies essentially start by naming "the Assured" as "Reliance Group Holdings, Inc." Later in the "Definitions" section, there is a definition of "Assureds," as meaning "the Company and the Directors and Officers." The term "Company" is said to mean "the Parent Company [RGH]" and also "any Subsidiary." The latter would include RIC.

  The first of the four blended policies is a "primary" policy, providing $10 million in aggregate coverage, and the other three blended policies are excess policies, providing, respectively, coverage of $20 million in excess of $10 million, $20 million in excess of $30 million, and $50 million in excess of $50 million. Thus, the policies provide total aggregate coverage of $100 million. According to the Underwriters, when that aggregate is exhausted, regardless of the category of coverage under which it is paid, the coverage ceases. With the exception of the premium and limit of liability, the terms of the four policies are identical. Coverage in all four categories of the blended policies extends both to liability as well as to costs, expenses, and fees incurred in the legal defense of assureds.

  The D&O coverage applies to any wrongful acts committed by the directors and officers of RGH or its subsidiaries. D&O coverage both reimburses RGH or a subsidiary in cases where the corporation indemnifies its directors and officers, and provides direct coverage to the individual officers and directors where indemnification is not permitted by state law or the corporation's charter or by-laws. Additionally, the D&O coverage directly insures RGH and its subsidiaries against securities claims — such as the instant suit — asserted against the corporation itself.

  The other three categories of coverage under the blended policies do not apply to the liabilities of directors and officers. Rather, these categories directly insure only RGH and its subsidiaries for their liabilities as corporate entities.

  The fifth policy is referred to as the "Side A" policy. Like the blended policies, the Side A policy starts by naming "the Assured" as "Reliance Group Holdings, Inc." Unlike the blended policies, the Side A policy contains no express definition of "the Assured." However, the first section, titled "Insuring Clause," states that

Underwriters shall pay on behalf of the Directors and Officers Loss which the Directors and Officers shall become legally obligated to pay as a result of a Claim first made against such Directors and Officers for a Wrongful Act in excess of the amounts payable under, or for which no amounts are payable with respect to such Loss under, or for which Underwriters wrongfully refuse or are financially unable to pay under the Directors and Officers Liability Section of the Underlying Insurance . . .
Later in the "Definitions" section, there is a definition of "Directors and Officers" as including "directors [and] officers . . . of a Company." The policy defines "Company" as meaning "the Parent Company" as well as "any Subsidiary." The definitions also make clear that "Underlying Insurance" refers to the blended policies described above. Thus, the only beneficiaries under the Side A policy are the directors and officers of RGH and its subsidiaries, including RIC.

  Plaintiffs and defendants have represented that proceeds of the insurance policies are paid on a first-come, first-served basis, following notification by an assured to the Underwriters of a claim. Although the policies themselves do not appear to state this directly, nothing in the policies contradicts this representation, and the Underwriters have not disputed it.

  The Underwriters have represented that, in addition to the instant action, several other lawsuits have been submitted by assureds for coverage under the policies. Four of these suits have been publicly disclosed, and two name RGH and RIC, respectively, as defendants. The Underwriters have represented with respect to the action naming RIC as a defendant that RIC submitted notification of the lawsuit, as required under the blended policies "as a condition precedent to . . . rights to payment," but that such notification was after expiration of the policies. The Underwriters assert that they "have not yet opined as to whether the post-expiry adversary action is `related' to [a prior action] and, as such, entitled to coverage." The Underwriters have also stated in general terms that notices of several other lawsuits, not yet publicly disclosed, involving potential liabilities of RIC have been submitted by RIC. The Underwriters have not indicated their intentions to approve or disapprove payment to RIC pursuant to these notices of claim. It is not known when the notices of claim regarding the non-public actions were filed.

  No party has given any indication of the amount of liability RIC may be facing, nor is there any suggestion that the total amount of such potential liability reaches or exceeds the total available coverage.

  On May 29, 2001, the same day on which the parties to the instant action entered into the MOU, the Commonwealth Court of Pennsylvania issued an order placing RIC in rehabilitation and naming Koken as Rehabilitator of RIC. The court's order directed Koken to take possession of all assets of RIC, "of whatever nature and wherever located, whether held directly or indirectly," and enjoined all parties from "obtaining preferences, judgments, attachments, garnishments or liens" that may impair the assets of RIC.

  On June 4, 2001, apparently after discovering the existence of the MOU and the Funding Agreement, Koken filed an Emergency Petition for Preservation of the Insurance Policy Assets of Reliance [RIC] Estate. Although the caption of the Emergency Petition names only RIC as defendant, the body of the petition has a lengthy description of the present action pending in the Southern District of New York, brought by shareholders of RGH against RGH and certain of its officers and directors. The Emergency Petition also complains that the MOU was improperly entered into, in derogation of the rights of the Pennsylvania Department of Insurance, and that the Funding Agreement would somehow "compromise" the insurance policies, which are said to be assets of RIC. The Emergency Petition requested that the Commonwealth Court of Pennsylvania declare that the policies referenced in the Funding Agreement are wholly assets of RIC, and further asked the court to prohibit RGH and its officers and directors, as well as the Underwriters, from effectuating the MOU and the Funding Agreement. The Emergency Petition was subsequently stayed for thirty days pursuant to a stipulation among Koken, defendants, and the Underwriters. In a June 8, 2001 cover letter that accompanied the order accepting this stipulation, Judge Collins of the Commonwealth Court stated:

Please be further advised that it is my position that, from this date forward, any actions which would either directly or indirectly negatively impact or diminish the assets of the Reliance Insurance Company must be approved not only by the Insurance Commissioner of the Commonwealth, but also by the Commonwealth Court of Pennsylvania.
  On June 12, 2001 RGH and RFSC filed for Chapter 11 bankruptcy in the Southern District of New York, thus staying the instant class action as against RGH pursuant to 11 U.S.C. § 362 (a). The bankruptcy actions are pending before Bankruptcy Judge Gonzalez. As stated earlier, there are no issues on the present motion relating to RFSC.

  On June 29, 2001 RGH removed the Emergency Petition to the United States District Court for the Eastern District of Pennsylvania, and simultaneously filed a motion to transfer venue of the matter to the Southern District. The case was assigned to the Eastern District of Pennsylvania Bankruptcy Court. On July 12, 2001 Koken filed a motion in the bankruptcy court to remand the Emergency Petition to the Commonwealth Court, or in the alternative for abstention in deference to the Commonwealth Court.

  RIC entered liquidation on October 3, 2001, and Koken was appointed as Liquidator. The order of the Pennsylvania Commonwealth Court granting Koken's petition for liquidation stated:

All assets of Reliance are hereby found to be in custodia legis of this Court; and this Court specifically asserts, to the fullest extent of its authority, (a) in rem jurisdiction over all assets of [RIC] whether they are held in the name of the company or any other name; (b) exclusive jurisdiction over all determinations of the validity and amount of claims against Reliance; and (c) exclusive jurisdiction over the determination of the distribution priority of all claims against Reliance.
  On February 22, 2002 the bankruptcy court in the Eastern District of Pennsylvania granted RGH's motion to transfer and denied Koken's motion to remand. Koken appealed that decision to the Eastern District of Pennsylvania on February 27, 2002, and the matter was assigned to Judge Weiner of that court. Koken asserts that upon the docketing of that appeal the clerk of the bankruptcy court ceased all efforts to transmit the Emergency Petition to the Southern District of New York.

  On March 12, 2002, Koken, RGH, RFSC, and the Creditors' Committees of RGH and RFSC entered into an agreement known as the Standstill Agreement. This agreement applies to the Emergency Petition litigation, as well as litigation concerning an order to show cause pending in the Southern District of New York Bankruptcy Court. The Standstill Agreement was amended and extended on several occasions subsequent to March 12, 2002. It should be noted that although the Standstill Agreement and its amendments have been referred to in the motions before the Court, the Standstill Agreement and the amendments thereto are not in the record. Nor does the record contain the order to show cause pending in the bankruptcy court.

  The stays of the Emergency Petition memorialized in the Standstill Agreement and the amendments thereto were approved by Judge Weiner from time to time during the pendency of the petition. On August 30, 2002 Judge Weiner issued an order stating the following:

[T]he . . . matters are DISMISSED WITHOUT PREJUDICE pending the lifting of the stays pending appeal. The cases are to remain in status quo and the Statute of Limitations is tolled.
This matter remains ACTIVE. It is further understood that all discovery and settlement discussions will continue and if intervention by the Court is needed or desired, the parties may ask for assistance by either filing the appropriate motions, writing to the Court or by setting a telephone conference. The parties shall keep the Court advised of the status of this case and may request a firm trial date or settlement conference by writing directly to the Court or by telephone conference.
  On April 1, 2003, Koken, in her capacity as Liquidator of RIC, entered into what was called a "Settlement Agreement" with the Creditors' Committees of RGH and RFSC ("the Creditors' Committees"). The Settlement Agreement notes that there had been various disputes between the Liquidator of RIC and the Creditors' Committees. The Settlement Agreement lists the subjects of those disputes. One such subject is said to relate to which of the parties to the agreement owns certain directors and officers insurance policies and the proceeds thereof. These policies include the blended and Side A policies described above. Paragraph 4 of the Settlement Agreement is titled, "D&O Litigation," and contains complex provisions, most of which have no relevance to the action in the Southern District of New York or the present motions before this Court. However, paragraph 4(e) is relevant to the present motions. It refers to the Standstill Agreement and its amendments.

  It is not necessary to determine the meaning of paragraph 4(e) in every respect. However, what is relevant for present purposes is the provision that the Emergency Petition, subject to one unresolved questions about where it should be lodged, "shall not be dismissed, but should be continued" — meaning, essentially, continued unresolved. Paragraph 4(e) states that

  the parties agree that no party shall file any further brief, motion, application, complaint, or proceeding, or take any other action, in any court or other tribunal, that seeks any ruling or order of any kind with respect to the subject matter of the Emergency Petition until such time as the parties agree to a dismissal or other resolution of the matter. However, paragraph 4(e) goes on to state that no party to the Settlement Agreement is prevented from participating in other litigation where the Emergency Petition might be relevant.

  Another relevant provision of the Settlement Agreement is paragraph 4 (b), which states that proceeds realized by the Liquidator, the Creditors' Committees, RGH, RFSC, or other bankruptcy estate representatives, arising out of any litigation against directors or officers of RGH, RFSC, or RIC, and paid from the insurance policies, will be divided between the RGH and RIC estate representatives. This provision applies to the Leibowitz derivative action, which is explicitly referenced in the MOU.

  The Settlement Agreement was approved by Judge Collins of the Commonwealth Court and by Bankruptcy Judge Gonzalez in June and July, 2003.

  On March 1, 2004 Koken filed in the Eastern District of Pennsylvania a motion to effectuate the Settlement Agreement of April 1, 2003. Among other things, it requests that Judge Weiner reinstate the above-described appeal of the transfer of the Emergency Petition to the Southern District Bankruptcy Court, that the Emergency Petition be remanded to the Commonwealth Court. According to correspondence from the parties, that motion has now been fully briefed and is awaiting decision.

  DISCUSSION

  On September 24, 2003 plaintiffs filed the instant motion requesting that this Court enforce the MOU and the Funding Agreement. On December 12, 2003 the Court held a conference on the motion, and at that time directed the parties to submit further briefing on issues regarding ownership of the insurance policies. Also at that time the Court renewed its prior requests that Koken be joined as a party to this action. Subsequently, Koken filed a motion to intervene, which motion was granted by the Court on February 24, 2004. Koken also filed at that time her motion to dismiss or stay plaintiffs' motion to enforce the MOU and the Funding Agreement.

  The most important issue to be decided on both pending motions is whether this Court has jurisdiction to enforce the MOU and the Funding Agreement. Both Koken and the Underwriters assert that this Court does not have such jurisdiction.

  Koken argues in her motion to dismiss or stay that the Eastern District of Pennsylvania has exclusive jurisdiction to resolve questions of ownership of the insurance policies and proceeds. Koken relies on the long-recognized rule that when two suits are in rem or quasi in rem, the first court to assume jurisdiction over the property in question maintains such jurisdiction to the exclusion of all other courts. Koken argues that the Eastern District of Pennsylvania has quasi in rem jurisdiction over the insurance policies and proceeds, due to the fact that the Emergency Petition was originally filed as a quasi in rem insurance receivership proceeding in state court, and therefore remained a quasi in rem matter upon its removal to the Eastern District. Koken argues that this Court is attempting to exercise quasi in rem jurisdiction over the same res as the Eastern District of Pennsylvania, by taking up the question of ownership rights in the insurance policies and proceeds. Accordingly, Koken argues, any determination by this Court of rights in the insurance policies would be without effect, because the quasi in rem jurisdiction of the Eastern District of Pennsylvania deprives this Court of jurisdiction over that property.

  Koken urges alternatively that the action pending in the Eastern District of Pennsylvania should take precedence over the instant action under the "first filed" rule. Koken argues that the Eastern District of Pennsylvania obtained jurisdiction over the Emergency Petition before this Court began consideration of questions regarding the insurance policies at issue in the MOU. Essentially, Koken argues that this Court did not assume jurisdiction over the insurance policy ownership questions until November 19, 2003, when it joined the Underwriters as parties to this action and stated that it was "essential" to decide "the question of ownership" of the insurance policies. Thus, Koken reasons that this Court's jurisdiction over those issues was second in time to the Eastern District of Pennsylvania. The Underwriters advance the related argument that approval by Koken and the Commonwealth Court of Pennsylvania must be obtained prior to effectuating the MOU and the Funding Agreement, on the ground that the insurance policies are property of the RIC estate. The Underwriters also argue that certain provisions of the April 1, 2003 Settlement Agreement between Koken and the Creditors' Committees prevents this Court from enforcing the MOU and the Funding Agreement. Finally, the Underwriters maintain that overlap between the plaintiff class in the instant action and the creditors class in the RGH bankruptcy bars enforcement of the MOU because such overlap may lead to double recovery by certain parties.

  It should be noted that Koken has not briefed in this Court substantive issues regarding enforcement of the MOU or ownership of the insurance policies. However, based on the position taken by Koken in the Emergency Petition, Koken may fairly be characterized as opposing plaintiffs' motion to enforce the MOU on the grounds that the insurance policies implicated by the Funding Agreement are assets of RIC. See In re Reliance Group Holdings, 273 B.R. 374, 380 (Bankr. E.D. Pa. 2002). Therefore, the Court will treat the position that approval by Koken and the Commonwealth Court of Pennsylvania must be obtained prior to effectuating the MOU as being advanced by both the Underwriters and Koken. The In Rem/Jurisdiction Issue

  In dealing with this issue, it is well to start by determining the significance, or lack of significance, of the proceedings in the various courts.

  Starting with the obvious, this Court has jurisdiction of the captioned action commenced in 2000 by shareholders of RGH against RGH and certain officers and directors of that company. The Court also has jurisdiction to take steps to effectuate the settlement agreement (the MOU), subject to an exception arising from the bankruptcy of RGH. The Underwriters, as parties to the Funding Agreement, became contractually bound to the defendants in this litigation. The defendants in this litigation were assureds under the blended policies, and the officer and director defendants were assureds under the Side A policy. The Underwriters are now parties to the present action, and the Court has jurisdiction to enforce the Funding Agreement, again subject to the exception arising from the bankruptcy of RGH.

  The Emergency Petition, filed in the Commonwealth Court in Pennsylvania in June 2002, sought to have that court declare the insurance policies to be under the jurisdiction of the Commonwealth Court, and further sought an order from that court preventing the carrying out of the MOU and the Funding Agreement. That petition was filed in June 2002. Before the Commonwealth Court could act, the Emergency Petition was removed to the federal court in the Eastern District of Pennsylvania, where it was assigned to the bankruptcy court. It should be emphasized that before this removal occurred, the Commonwealth Court had not made any ruling of any kind asserting in rem or quasi in rem jurisdiction over the insurance policies or asserting any other kind of jurisdiction that affected the rights of the parties to the MOU or the obligations of the Underwriters under the Funding Agreement. The June 8, 2001 cover letter of Judge Collins did not even purport to constitute such a ruling. The October 3, 2001 order of the Commonwealth Court, taking jurisdiction of the assets of RIC for purposes of liquidation, was the kind of general order routinely entered upon the commencement of an insurance company liquidation, and did not constitute any ruling as to what such assets were. In no sense did it constitute a ruling on the issues raised by the Emergency Petition.

  When RGH filed for bankruptcy in the Southern District of New York on June 12, 2001, this filing had the effect of staying the class action against RGH. Ordinary principals of bankruptcy law, wholly apart from the Emergency Petition, apply to the rights and obligations of RGH under the MOU and the Funding Agreement. However, this has nothing to do with the Emergency Petition.

  Nonetheless, RGH was sufficiently concerned about the Emergency Petition so that it started a process of motions and cross-motions, as a result of which the Emergency Petition is now before Judge Weiner of the Eastern District of Pennsylvania to decide whether the petition should go to the Southern District of New York Bankruptcy Court or should be remanded to the Pennsylvania Commonwealth Court. The matter has been before Judge Weiner since February 27, 2002.

  Commencing with the Standstill Agreement of March 12, 2002, Judge Weiner approved a serious of consensual stays of the matter. Then Judge Weiner decided to remove the matters from his docket pursuant to his order of August 30, 2002, which stated that the matters are "DISMISSED WITHOUT PREJUDICE." His entire order has already been quoted.

  In the various proceedings about the Emergency Petition, just referred to, no substantive rulings were made. None of the courts involved made any decision asserting in rem or quasi in rem jurisdiction of the insurance policies based on the Emergency Petition, or any ruling affecting either the rights and obligations of the parties to the MOU or the obligations of the Underwriters under the Funding Agreement.

  It is now necessary to deal with the Settlement Agreement of April 1, 2003. Although that agreement contains provisions allocating certain rights and certain funds as between Koken and the Creditors' Committees, the agreement did not, and could not, deal with the rights or obligations of the parties to the MOU or the obligations of the Underwriters under the Funding Agreement. The parties to the MOU were, of course, the plaintiffs and the defendants in the present lawsuit. The parties to the Funding Agreement were the defendants in the present case and the Underwriters. The parties to the MOU and the Funding Agreement were not parties to the Settlement Agreement. Thus, the Settlement Agreement does not create a bar to enforcement of the MOU and the Funding Agreement.

  The history of the litigation initiated by the Emergency Petition is remarkable. Nearly three years have passed since the time when the petition was filed, in which Koken purported to attack the MOU and the Funding Agreement and asserted that the insurance policies are subject to the sole jurisdiction of the Commonwealth Court. Exactly how this petition, naming as the sole defendant RIC, gave the Commonwealth Court jurisdiction to invalidate the contractual rights of numerous other parties has never been explained. The issues raised by the Emergency Petition have simply remained in limbo without reasonable steps to bring them to a resolution. Koken has had her procedural appeal pending before Judge Weiner for over two years. Even a decision on this appeal would not resolve any of the substantive issues raised by the Emergency Petition. It was not until March 1, 2004 that Koken, obviously activated by the litigation in the Southern District, filed an application before Judge Weiner asking that the appeal be reinstated. Judge Weiner has not ruled on this belated application.

  The inevitable conclusion from what has been described is that the Emergency Petition has never brought the insurance policies within the in rem or quasi in rem jurisdiction of the Commonwealth Court of Pennsylvania, nor has any of the other courts involved been vested with such in rem or quasi in rem jurisdiction by virtue of the Emergency Petition. The rights and obligations of the parties to the MOU and the Funding Agreement have never been the subject of any substantive ruling by the Commonwealth Court of Pennsylvania or any other court pursuant to a claim under the Emergency Petition.

  Koken nevertheless relies on Princess Lida of Thurn and Taxis v. Thompson, 305 U.S. 456 (1939), to argue that this Court may not exercise jurisdiction over the insurance policy proceeds in light of the Eastern District of Pennsylvania's "jurisdiction" over the Emergency Petition. It is well to emphasize that the contention relates to the Eastern District of Pennsylvania. In Princess Lida, actions were brought in the Common Pleas Court of Pennsylvania, as well as a Pennsylvania federal court, concerning administration of a trust. The Court determined that the first-filed accounting action in the Court of Common Pleas was a quasi in rem action that invoked the state court's statutory supervisory authority in matters relating to trust administration. The Court further determined that the later-filed federal action was also a quasi in rem proceeding that called upon the federal court to exercise supervisory authority over the same trust res as was before the Court of Common Pleas. Under these circumstances, the Court held that the second-filed federal action must defer to the first-filed state action. The Court set forth the following reasoning:

[I]t is settled that where the judgment sought is strictly in personam, both the state court and the federal court, having concurrent jurisdiction, may proceed with the litigation at least until judgment is obtained in one of them which may be set up as res judicata in the other. On the other hand, if the two suits are in rem, or quasi in rem, so that the court, or its officer, has possession or must have control of the property which is the subject of the litigation in order to proceed with the cause and grant the relief sought the jurisdiction of the one court must yield to that of the other.
Id. at 466.

  Koken's reliance on Princess Lida is misplaced. In the first place, it is clear in this Circuit that Princess Lida sets forth a prudential rule of comity, rather than a jurisdictional rule. See Carvel v. The Thomas and Agnes Carvel Foundation, 188 F.3d 83, 86 (2d Cir. 1999).

  In any event, it is clear from the analysis set forth earlier in this opinion that the Eastern District of Pennsylvania has made no ruling or declaration of any kind asserting in rem or quasi in rem jurisdiction over the insurance policies or their proceeds. Moreover, it would be manifestly unjust to those litigants who are legitimately seeking relief in the case before the Southern District of New York to abstain in favor of the long-delayed procedural appeal in the Eastern District of Pennsylvania.

  Koken argues alternatively that the action pending in the Eastern District of Pennsylvania should take precedence over the instant action under the "first filed" rule. Little discussion of this issue is necessary. The present action in the Southern District was commenced prior to the time the Emergency Petition was filed in the Commonwealth Court, and even longer before the procedural matters came before the Eastern District of Pennsylvania.

  In short, the Court concludes that there are no circumstances in the instant action that constitute any "extraordinary and narrow exception to the duty of the District Court to adjudicate a controversy properly before it." Colorado River Water Conservation District v. United States, 424 U.S. 800, 813 (1976). The Court has the jurisdiction to proceed in an orderly fashion to enforce the MOU and the Funding Agreement.

 Ownership of Insurance Policies and Proceeds

  It is now necessary to take up the questions of ownership rights in the insurance policies and proceeds. The Underwriters and Koken argue that these policies, as well as their proceeds, are property of the RIC liquidation estate, and that therefore the Underwriters may not fund the MOU without the approval of both Koken and the Commonwealth Court.

  There is some authority to the effect that a bankruptcy court may take jurisdiction over an insurance policy belonging to the bankrupt debtor, even though the debtor is only one of several assureds named in the policy. See, e.g., MacArthur Co. v. Johns-Manvilie Corp., 837 F.2d 89, 91-93 (2d. Cir. 1988); In re The Leslie Fay Companies. Inc., 207 B.R. 764, 786-87 (Bankr. S.D.N.Y. 1997); In re Sacred Heart Hospital of Norristown, 182 B.R. 413, 419-20 (Bankr. E.D. Pa. 1995). In these cases the bankruptcy courts have asserted jurisdiction even over claims under the policy made by non-bankrupt assureds, the theory being that such claims may diminish the assets of the bankruptcy estate. Such cases have included instances where the insurance policies at issue provide a single coverage limit that applies both to corporate and to director and officer assureds. However, other cases hold that a bankruptcy court should only take jurisdiction with respect to the rights of the bankrupt debtor under an insurance policy. See, e.g., In re Louisiana World Exposition, Inc., 832 F.2d 1391, 1399-1400 (5th Cir. 1987); In re Adelphia Communications Corp., 298 B.R. 49, 52-53 (S.D.N.Y. 2003); In re First Central Financial Corp., 238 B.R. 9, 17 (Bankr. E.D.N.Y. 1999). In these cases the rights of non-bankrupt assureds against the insurer are left to be pursued outside of the bankruptcy court. Across both categories of cases, courts have tended to adopt a fact-sensitive approach to resolving the insurance ownership rights of bankrupt and non-bankrupt co-assureds, taking into account the structure and limits of the coverage, as well as the extent to which the claims of the non-bankrupt assureds, particularly directors and officers, actually threaten claims of the bankrupt debtor.

  In the present case, the position of the Underwriters and Koken is not supported by either line of cases. None of the policies in question can be considered to be exclusively the property of the RIC estate, giving Koken and the Commonwealth Court have the authority to approve or veto the MOU and the Funding Agreement. If the policies "belong" to any single party, that party is RGH, and not RIC. This is clear from the language of the policies, described earlier. RGH, of course, is in bankruptcy in the Southern District of New York.

  There is no need for the Court on the present motions to determine whether or not the insurance policies are in fact assets of the bankruptcy estate of RGH. No party is seeking a ruling to this effect. Under ordinary principles of bankruptcy law the present action is stayed as to RGH and the rights and obligations of RGH under the MOU and the Funding Agreement will be within the cognizance of the bankruptcy court. All this is under ordinary principles of bankruptcy law. In any event, the MOU expressly provides that the MOU must be approved by RGH's bankruptcy court.

  But, it should be reiterated that there is no basis for holding that the insurance policies and their proceeds are property of the RIC liquidation estate, or that the MOU and the Funding Agreement are subject to the jurisdiction of the Commonwealth Court of Pennsylvania.

  Aside from ownership of the insurance policies, it is clear that neither Koken nor the Commonwealth Court may lay claim to the proceeds of the insurance policies implicated in the MOU and the Funding Agreement. Under Pennsylvania law, Koken's rights in the insurance policies as liquidator are no greater than those of RIC itself prior to liquidation. See Kaiser v. Monitrend Investment Management. Inc., 672 A.2d 359, 364 n.5 (Pa. 1996); Com. ex rel Kelly v. Commonwealth Mutual Insurance Co., 299 A.2d 604, 606 (Pa. 1973). Thus, any claim that the assets of the RIC estate include any insurance policy proceeds that RIC was not entitled to claim as of the time of its liquidation is entirely unfounded.

  With respect to the Side A policy, the language of the policy makes clear that the only beneficiaries of the policy are the directors and officers of RGH and its subsidiaries, including RIC. RIC itself is entitled to make no claim under the policy, and the Underwriters may pay no proceeds to RIC. A fortiorari, it is also the case that, to whatever extent this policy may be used to fulfill the Underwriters' obligations under the MOU and the Funding Agreement, Koken and the Commonwealth Court have no say in the matter.

  Although the Side A policy has a liability limit of $25 million, which is in excess of the $17.4 million required under the Funding Agreement, the Side A policy in itself is insufficient to fund the settlement contemplated by the MOU. This is because the MOU contemplates settlement with respect to not only the individual directors and officers named in the instant action, but also with respect to RGH. As stated above, RGH is not covered under the Side A policy. Thus, it is clear that in order to fulfill its obligation under the Funding Agreement, the Underwriters would need to draw, at least in part, on the blended policies.

  RIC is an assured under the blended policies. However, this status does not give RIC an automatic right to the proceeds of the policies. The terms of all four blended policies provide that "as a condition precedent to [assureds'] rights to payment," the assureds must "give to the Lead Underwriter notice in writing of any Claim as soon as practicable after the Assureds become aware of such Claim." Thus, an assured's right to the proceeds of the policies is not triggered until the assured presents a valid written claim for coverage to the Underwriters. Moreover, plaintiffs and defendants assert, and the Underwriters do not contest, that the proceeds of the policies are paid on a first-come, first-served basis. This practice is apparently consistent with the way in which proceeds are distributed under policies with multiple assureds and a fixed aggregate cap. See In re First Central, 238 B.R. at 14.

  As of the signing of the Funding Agreement wherein the Underwriters promised to draw on the insurance policies to fund the settlement contemplated by the MOU, RGH and the individual defendants effectively notified the Underwriters of a claim. It happens that the date of the MOU and the Funding Agreement was the same date when the rehabilitation order was entered for RIC. However, there is no indication that RIC or Koken, as Rehabilitator, made any claims on the polices at or prior to this time. Indeed, it appears that any claims on behalf of RIC were made much later. Thus, the Court concludes that RIC and Koken have no rights in the $17.4 million proceeds of the policies that the Underwriters have agreed will fund the MOU.

  It must be emphasized that the existence of the MOU and the Funding Agreement place the instant case in a unique posture. The individual defendants have rights against the Underwriters by virtue of these agreements, as well as under the five insurance policies described in this opinion. These rights of the individual defendants predate, and exist independent of, the status of the RIC estate in liquidation, or the RGH estate in bankruptcy.

  Finally, the Court rejects any contention that approval of the MOU and Funding Agreement by Koken or the Commonwealth Court is required by the mere force of Judge Collins's June 8, 2001 order and accompanying cover letter. The June 8 order stayed consideration of the Emergency Petition for thirty days. The thirty-day stay has long since expired, and the Emergency Petition is no longer before Judge Collins. Thus, neither the order nor the cover letter accompanying it could possibly be construed as binding this Court.

  The Underwriters raise additional objections to this Court's enforcement of the MOU and the Funding Agreement, based on the existence of the April 1, 2003 Settlement Agreement between Koken and the RGH Creditors' Committees, as well as the pending RGH bankruptcy proceeding.

  The Court reiterates its disagreement with the notion that the Settlement Agreement dealt in any way with the rights or obligations of the parties to the MOU and the Funding Agreement. None of the parties to the MOU or the Funding Agreement were parties to the Settlement Agreement. Therefore, the Settlement Agreement has no effect whatever upon the issues regarding the enforcement of the MOU and the Funding Agreement.

  It is true that the Settlement Agreement refers to the Leibowitz action, and the MOU requires that the Leibowitz action be terminated as a condition precedent to carrying out the MOU. However, the Settlement Agreement in paragraph 4(b) merely sets forth arrangements for dividing any recovery in a directors and officers action, such as the Leibowitz action, among the enumerated parties. In no way does that provision stand in the way of the disposition of the Leibowitz action.

  With regard to the RGH bankruptcy proceeding, there is nothing in relation to that proceeding that automatically bars the carrying out of the MOU and the Funding Agreement. As already described, the bankruptcy court has its responsibility under the normal bankruptcy laws with respect to the rights and obligations of RGH. Also, under the terms of the MOU, the bankruptcy court must approve the MOU. But surely it cannot be assumed that the bankruptcy court will disapprove the MOU or prevent the enforcement of the MOU and the Funding Agreement, since such enforcement will relieve RGH of a substantial liability.

  Finally, the Underwriters contend that there may be overlap in the plaintiff class in the present action, and the creditors in the RGH bankruptcy, thus leading to the possibility of double recovery under the MOU. This matter can easily be dealt with by the courts.

  Thus, the Court finds no merit in the various objections of the Underwriters to being required to carry out their duties under the Funding Agreement.

  CONCLUSION

  Plaintiffs' motion to enforce the MOU and the Funding Agreement is granted. Koken's motion to dismiss or stay plaintiffs' motion is denied. There is a need for a detailed order describing the terms of any appropriate declaratory and injunctive relief, and any other appropriate relief. The parties are directed to settle such an order.

  SO ORDERED


Buy This Entire Record For $7.95

Official citation and/or docket number and footnotes (if any) for this case available with purchase.

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