In the Matter of the Liquidation of Midland Insurance Company
This case is not published in a printed volume and its disposition appears in a table in the reporter.
On Motion Seq. 67
Attorneys for Superintendent of Insurance of the State of New York as Liquidator of Midland Insurance Company: McCarthy, Leonard, Kaemmerer, Owen, McGovern, Striler Menghini, L.C. By: James C. Owen, Esq.
Attorneys for Everest Reinsurance Company f/k/a Prudential Reinsurance Company: Budd Larner, P.C. A Professional Corporation By: Vincent Proto, Esq.
On Motion Seq. 70
Attorneys For Everest Reinsurance Company f/k/a Prudential Reinsurance Company: Budd Larner, P.C. A Professional Corporation By: Vincent Proto, Esq.
Attorneys for Superintendent of Insurance of the State of New York as Liquidator of Midland Insurance Company: McCarthy, Leonard, Kaemmerer, Owen, McGovern, Striler Menghini, L.C. By: James C. Owen, Esq. and Schillinger Finsterwald, LLP By: Peter Schillinger, Esq.
On Motion Seq. 76
Attorneys for Policyholder Baxter International, Inc., formerly known as Baxter Travenol Laboratories, Inc.: Shapiro, Rodarte Freedman, LLP By: Cindy F. Forman, Esq.
Attorneys for Superintendent of Insurance of the State of New York as Liquidator of Midland Insurance Company: McCarthy, Leonard, Kaemmerer,
Owen, McGovern, Striler Menghini, L.C. By: James C. Owen, Esq.
Attorneys for Everest Reinsurance Company f/k/a Prudential Reinsurance Company: Budd Larner, P.C.
A Professional Corporation By: Vincent Proto, Esq.
Michael D. Stallman, J.
These motions require the Court to reexamine well-established principles, procedures and assumptions of insurance liquidation insofar as they affect contract rights of reinsurers.
In this insurance liquidation proceeding of Midland Insurance Company, a reinsurer moves for an order lifting a permanent injunction barring suits against Midland, its estate or its liquidator. The reinsurer, Everest Reinsurance Company, intends to bring an action against the Superintendent of Insurance, in his capacity as the Liquidator of Midland.  Everest alleges that the procedures of the New York Liquidation Bureau  in handling, determining, and settling insurance claims violates provisions of reinsurance contracts between Midland and Everest.
By an interim decision and order dated November 8, 2006, the Court directed the Liquidator and Everest to submit supplemental briefs, and the Court granted the policyholders and reinsurers of Midland an opportunity to be heard on whether the injunction should be lifted to permit Everest to sue Midland and the Liquidator.
While Everest's motion was pending, Everest brought another motion to vacate the Court's interim decision and order, and sought, among other things, an order precluding policyholders from submitting any settlement agreements that policyholders wished to proffer in responding to Everest's motion. In turn, a policyholder, Baxter International Inc., brought a motion for leave to respond to Everest's motion to vacate the interim decision and order.
The arguments raised in these motions overlap considerably. This decision therefore addresses all three motions: Everest's motion to vacate the Court's interim decision and order (Motion Seq. No. 70) ( see Section II); Baxter's motion for leave to submit papers (Motion Seq. No. 76) (see Section III); and Everest's motion to lift the injunction (Motion Seq. No. 67) (see Sections IV-VII).
A. Background 
Midland began as a stock casualty insurer incorporated under the laws of Delaware, with its principal office in New York, New York. Midland was a multi-line carrier that wrote, among other things, a substantial amount of excess coverage for major Fortune 500 companies (hereinafter, Major Policyholders, or MPHs), which were confronted with significant environmental, asbestos, and product liability claims (such as breast implant litigation and HIV-tainted blood factor litigation) starting in the 1980s.
In 1985, the New York State Department of Insurance proceeded to monitor Midland's impaired financial condition. On March 7, 1986, the Department of Insurance directed Midland to eliminate its financial impairment and insolvency, or else the Department of Insurance would seek an order placing Midland into receivership. Midland's board of directors voted unanimously to consent to entry of a liquidation order pursuant to Insurance Law 7404. By order of liquidation dated April 3, 1986, Justice Thomas Hughes ordered that
"the officers, directors, trustees, policyholders, agents and employees of Midland, and all other persons, including but not limited to claimants, plaintiffs, and petitioners who have claims against Midland are permanently enjoined and restrained from bringing or further prosecuting any action at law, suit in equity, special or other proceeding against the said corporation or its estate, or the Superintendent and his successors in office, as Liquidator thereof, or from making or executing any levy upon the property or estate of said corporation, or from in any way interfering with the Superintendent, or any successor in office, in his possession or in the discharge of his duties as Liquidator thereof, or in the liquidation of the business of said corporation . . . ."
Proto Affirm. (Aug. 10, 2006), Ex B, at 7-8 (emphasis added).
As of the date of liquidation, the bulk of Midland's reported assets consisted of reinsurance recoverables.  The Midland estate has two types of reinsurance policies: treaty reinsurance and facultative reinsurance. Under treaty reinsurance, Midland ceded to reinsurers a part of the risk of a class of policies that Midland had issued in exchange for a portion of the premium that policyholders paid to Midland. Under facultative reinsurance certificates, Midland had a contract of indemnity with reinsurers to cover a particular risk on a policy-by-policy basis.  As is relevant to the instant motions, Midland entered into reinsurance treaties with Everest from 1974 to 1983, and into facultative reinsurance certificates with Everest from 1972 to 1986 (hereinafter, collectively, reinsurance contracts). The Liquidator determined that reinsurance was Midland's most significant, non-invested asset.
As required under Insurance Law 7434, payments to be distributed from the insolvent estate are made upon the recommendation of the Superintendent, and under the direction of the court, i.e., the New York State Supreme Court Justice assigned to supervise the liquidation. By order dated January 30, 1997, Justice Beverly Cohen approved a procedure for court approval of claims that the Liquidator has allowed. The Liquidator periodically prepares a list of claims recommended for allowance, and serves each claimant with a "Notice of Determination" by first class mail to the claimant's last known address. The Notice of Determination advises the claimant that:
"(i) The claimant's claim has been recommended for an allowance by the Liquidator in the amount set forth therein;
(ii) If the claimant accepts the Liquidator's recommendation, the claimant is not required to take any further action. The Liquidator will submit an ex-parte motion to this Court for an order approving his recommendation for allowance in the amount set forth on the Notice of Determination. The recommendation will be approved by the Court and the claimant will be entitled to share, pro rata, in the distributions of assets, if any, to be made by the Liquidator based on the amount allowed.
(iii) If the claimant disputes the amount recommended for allowance, the claimant may object to the Notice of Determination by serving a written objection to the Liquidator. The written objection must be received by the Liquidator within sixty days of the date of the Notice of Determination.
(iv) The Liquidator will refer each claim for which there is a timely objection to the referee appointed by order entered August 3, 1987 to hear and report on the validity of claimant's objections . . . ."
If no objection is received from the claimant within 60 days, then the Liquidator has 15 days thereafter to submit an ex-parte motion for judicial approval and confirmation of the Liquidator's recommended allowance. The procedure does not require the Liquidator to notify reinsurers or to solicit their involvement.
In 2002, this Court was assigned to supervise Midland's liquidation. By order dated October 17, 2005, this Court approved the Liquidator's report on the status of the Midland liquidation. As of October 2005, the Liquidator believed that the affairs of Midland's estate were in such a condition that a distribution of assets on allowed claims could be made to class 2 creditors.  In addition to policyholders who filed claims, Midland's class two creditors include three New York Security Funds and 56 sister-state Guaranty Associations which "stand in the shoes" of Midland and pay many thousands of Midland policyholder claims, up to various statutory monetary caps.
By a Case Management Stipulation and Order No. 1, so-ordered July 31, 2006 (CMO No. 1), this Court permitted the Liquidator and MPHs whose claims were disallowed, in whole or in part, to address common legal issues that would have been determined piecemeal before the Special Referee appointed to hear policyholders' objections. The Court also permitted the reinsurers to "intervene," i.e., submit briefs on the common legal issues.
B. The Instant Motions
On August 10, 2006, Everest brought this motion to lift the permanent injunction barring actions against Midland to bring an action seeking a judgment declaring that the Liquidator breached Everest's reinsurance contracts with Midland, and for injunctive relief. According to Everest, the Liquidator (standing in the shoes of Midland) did not provide Everest with timely notice of claims that would trigger Everest's reinsurance obligations; denied Everest the opportunity to participate in the defense and settlement of claims; did not provide information about claims as it requested; and did not provide access to Midland's records. Everest seeks a judgment declaring that it is not required to indemnify Midland as result of those alleged breaches, and Everest seeks a permanent injunction restraining the Liquidator from engaging in any settlement negotiations for claims, unless Everest is given an opportunity to have meaningful access to Midland's records and to participate in those settlement negotiations.
Everest focuses specifically on several claims that the Liquidator allegedly mishandled, including: (1) claims from Revlon, Inc. arising from HIV-contaminated blood factor concentrates of Armour Pharmaceutical Company, an indirect subsidiary of Revlon, Inc.; (2) claims from Pfizer, arising from Pfizer heart valves alleged to be defective; and (3) claims from Eli Lilly Co., arising from personal injuries from diethylstilbestrol (DES).
By an interim decision and order dated November 8, 2006, this Court directed Everest to provide notice of Everest's motion to Midland's policyholders and reinsurers, and the Court afforded them an opportunity to respond to Everest's motion.  Some policyholders who learned of Everest's motion had already indicated a desire to submit papers. The Court also directed Everest and the Liquidator to submit supplemental briefs to address statutory and contract interpretation issues raised in their papers, by answering six specific questions. 
Everest then brought a motion to vacate the Court's interim decision to the extent that the order permits Midland's policyholders to have a voice in Everest's pending motion to lift the injunction. The motion also seeks to limit the Liquidator's and Midland's policyholders' contentions, by precluding them from introducing evidence of settlements between Midland's policyholders and Everest. Everest also requested discovery in aid of the supplemental briefs, because Everest believed that one of the specific questions raised factual issues warranting discovery.
Baxter International Inc., a Midland policyholder, brought a motion for leave to respond to Everest's motion to vacate the Court's interim decision and order. Baxter assumed that leave of Court would be necessary for Baxter to respond to Everest's motion to vacate the Court's interim decision, because it is not a named party to the liquidation proceeding, and the Court permitted policyholders to address only Everest's motion to lift the injunction. Baxter argues that Everest would not be entitled to seek an order of preclusion against a non-party. Baxter wishes to inform the Court that Everest allegedly agreed to settle HIV-contaminated blood factor claims with its own policyholders on the same allocation principles and methodology that Everest now claims the Liquidator should not have followed in allowing the blood factor claims of Midland's policyholders.
Everest seeks to vacate and stay the part of Court's interim decision granting policyholders and reinsurers an opportunity to be heard on Everest's motion to lift the injunction barring actions against Midland. Everest believes that its motion does not implicate the policyholders' rights. Everest's proposed action against Midland is based on breach of contract, and the policyholders are not parties to the reinsurance contracts at issue. Accordingly, Everest contends that policyholders should not be permitted "to inject themselves" into a contractual dispute. Everest also questions the authority of the Court to grant the policyholders and reinsurers an opportunity to be heard. As some policyholders have announced their intention to show that some of the allegations of breach are belied by Everest's settlements with its own policyholders, the motion to vacate is also a preemptive strike to limit the policyholders' submissions.
As a threshold matter, the branch of Everest's motion to vacate that seeks a stay of the interim decision and order is denied as moot. Everest sought a stay of the interim decision and order pending the determination of Everest's motion to disqualify the Liquidator's counsel, which has been denied.  Everest did not seek a temporary restraining order staying the interim decision and order when it brought its motion to vacate. Both Everest and the Liquidator adhered to the briefing schedule as ordered.
It is well-settled that "the reinsurer has no privity with, and is generally not liable to, the original purchaser of the underlying policy." Travelers Indem. Co. v Scor Reinsurance Co., 62 F.3d 74, 76 (2d Cir 1995). However, Everest confuses the policyholders' lack of privity and their consequent lack of standing in the proposed action against Midland. Although only Midland is a "party" to the liquidation proceedings, all Midland policyholders who file claims are subject to the jurisdiction of the liquidation court. Corcoran v Hall Co., 149 A.D.2d 165, 173-174 (1st Dept 1989). The Court's decision on Everest's motion would become law of the case in this liquidation proceeding.
Because the Superintendent holds office as Liquidator to protect the interests of policyholders in the liquidation proceeding ( Corcoran v Ardra Ins. Co., 77 N.Y.2d 225, 232 ), there is generally no need for the policyholders to speak on their own behalf as a matter of due process. See Ballesteros v New Jeresy Prop. Liability Ins. Guaranty Assn, 530 F.Supp. 1367 (D NJ 1982), affd without opinion 696 F.2d 980 (3d Cir 1983).
However, in this case, Everest has alleged that the Liquidator has mishandled claims. If proven, this might suggest that the Liquidator acted in a manner contrary to protecting the interest of policyholders. Moreover, assuming Everest's interpretation of its contracts with Midland is correct, the contractual rights cannot be enforced without changing the Liquidator role's in the management of the liquidation proceeding. Everest seeks to become involved in the claims adjustment process in the "pre-allowance stage," i.e., before the Liquidator has determined that a claim should be paid. See Everest Mem. to Vacate, at 6.
Everest's motion to permit the proposed action against Midland raises important questions about the role that reinsurers may play, not only in the liquidation proceeding, but also in the day-to-day affairs of the Liquidator. The contractual rights at issue are standard provisions in a reinsurance contract, permitted by Insurance Law 1308. Should Everest establish a right of participation in the "pre-allowance stage" of the liquidation, the Liquidator indicates that as many as 400 reinsurers could assert similar rights. This is an esoteric area of law for which case law provides little guidance to the circumstances at hand.
In the exceptional circumstances presented, the Court exercised its discretion to allow the policyholders to speak on their own behalf. If Everest demonstrates that its breach of contract claims against Midland have a likelihood of success on the merits, then modifications to the claims allowance procedures could follow. Although the impetus for considering changes to the allowance procedures arose from a contractual dispute, changes to the allowance procedures would affect all of Midland's policyholders. All policyholders were granted an opportunity to be heard as a matter of fairness; it does not matter that only some policyholders wanted and took the opportunity.
The Court's decision to solicit the input of the policyholders and reinsurers is in keeping with the purpose of Article 74 of the Insurance Law, which adopted the Uniform Insurers' Liquidation Act (UILA). The Court's power to do so derives from the Court's oversight of the liquidation proceedings in general.  "The over-all purpose of the Uniform Act, like liquidation proceedings generally, is not only to preserve available assets for the benefit of creditors, but to protect the interest of persons who purchased insurance policies from a company which has become insolvent." Matter of Transit Cas. Co. (Digirol Superintendent of Ins.), 79 N.Y.2d 13, 20 (1992). By analogy, in the context of corporate liquidation proceedings, "[n]otice shall be given to such other persons interested, and in such manner, as the court may deem proper, of any hearings and of the entry of any orders on such matters as the court shall deem proper." Business Corporation Law 1008 (b). Thus, Everest's challenge to the Court's power to require notice to the policyholders and reinsurers, and an opportunity to be heard, is denied as meritless.
As the Court indicated in its interim decision and order, Everest bears the cost of notice to policyholders and reinsurers because Everest's motion created the exceptional situation warranting such notice. The cost of the notice would not have been incurred but for Everest's motion. Requiring the Midland estate to bear the cost of notice would be a waste of its assets, and therefore Insurance Law 7419 (b) affords the Court broad discretion to enter orders that it deems necessary to prevent such waste.
The Court also notes that making Everest bear the cost of notice is in keeping with the tenor of the interposition rights that Everest seeks to enforce in its proposed action against Midland. A reinsurer that elects to interpose a defense to a claim otherwise available to an insolvent insurer bears the cost of interposing the defense; the cost is chargeable to the insolvent estate only if a benefit accrues to the estate, subject to court approval. See Insurance Law 1308 (a) (3). Everest should therefore bear the cost of all expenses associated with enforcing its interposition rights.
Everest's motion to vacate also seeks discovery of the Liquidation Bureau's claims handling procedures of Midland claims and "immediate and complete access" to the Liquidation Bureau's records of Midland.  According to Everest, it is entitled to such discovery because the Court improperly converted its motion to vacate into a motion for summary judgment, when the Court required supplemental briefing on the Liquidation Bureau's claims handling practices.
Everest has misunderstood the Court's interim decision and order. As indicated in the interim decision and discussed further in Section IV of this decision, the Court is entitled to evaluate the likelihood of success of Everest's proposed action against Midland, in considering whether the permanent injunction should be lifted. If Everest cannot show a likelihood that its action against Midland would succeed, then the Midland estate should not have to bear the expense of full-blown litigation where the merits are not likely to be proven. Because Everest alleges that the Liquidation Bureau's claims handling in this liquidation was ...