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In the Matter of the Liquidation of Midland Insurance Company. v. Swiss Reinsurance America Corporation

April 5, 2011

IN THE MATTER OF THE LIQUIDATION OF MIDLAND INSURANCE COMPANY. AMERICAN STANDARD INC., ET AL., APPELLANTS, ECHLIN, INC., ET AL., CLAIMANTS,
v.
SWISS REINSURANCE AMERICA CORPORATION, ET AL., INTERVENORS-RESPONDENTS,
SUPERINTENDENT OF INSURANCE OF THE STATE OF NEW YORK, &C., ET AL., RESPONDENTS.



The opinion of the court was delivered by: Ciparick, J.:

This opinion is uncorrected and subject to revision before publication in the New York Reports.

In this choice-of-law dispute between policyholders and the New York State Liquidation Bureau, the question presented is whether the insurance policies issued by Midland Insurance Company (Midland) must be interpreted under New York substantive law because Midland has been adjudged insolvent and placed into liquidation in New York. We conclude that New York law need not apply and hold that for each Midland policy in dispute an individual choice-of-law analysis must be conducted to determine which jurisdiction's law should govern.

I.

Headquartered in lower Manhattan, Midland was incorporated under New York Law in October 1959 as a stock casualty insurer. Its charter authorized Midland to conduct business throughout the United States and in Canada. Midland carried multiline insurance, a type of insurance that typically bundles together different exposures to risks. During its existence, Midland transacted with Fortune 500 companies nationwide, underwriting a substantial amount of excess coverage policies.

In 1985, the New York State Insurance Department (the Insurance Department) commenced an investigation into Midland's financial condition. The Insurance Department's analysis of Midland's financial condition revealed that the company's liabilities exceeded its assets. On March 7, 1986, the Insurance Department warned Midland that it would seek an order placing Midland into receivership if Midland was unable to get its financial affairs in order. Midland could not comply with the Insurance Department's directives and, by a unanimous vote of its Board of Directors, consented to liquidation.

By order dated April 3, 1986 (the Liquidation Order), Supreme Court adjudged Midland insolvent and placed it into liquidation pursuant to Article 74 of the New York Insurance Law. As of this date, Midland's financial records showed that its assets totaled approximately $307 million while its liabilities totaled approximately $354 million, making it insolvent by about $47 million. The Liquidation Order authorized the Superintendent of the Insurance Department (the Liquidator) to take possession of Midland's property and to sell or otherwise dispose of it at the best obtainable price.

Following the entry of the Liquidation Order in Supreme Court, the Liquidator began the statutorily mandated process of notifying all persons with potential claims against Midland. To that end, the Liquidator mailed out over 38,000 proof of claim forms to known Midland policyholders, and other creditors. In addition to providing Midland's policyholders and creditors with notice of Midland's insolvency, the Liquidator informed them of their obligation to present their claims by filing the requisite proof of claim forms with the Insurance Department no later than April 3, 1987.*fn1

Article 74 of the Insurance Law vests the Liquidator with the authority to review these submitted claims and make recommendations to Supreme Court on what claims should be allowed or disallowed. Claims approved by Supreme Court are entitled to a share in Midland's estate while disallowed claims are not. By order dated March 15, 1994, Supreme Court established the procedure for the disallowance of claims. The order provided that the Liquidator must send a "Notice of Recommendation of Disallowance" (NOD) to those policyholders whose claims have been recommended for disallowance. The order also permitted anyone who received a NOD to file a written objection with the Liquidator within 60 days of the posted NOD date. Objections to the NOD timely received would be referred to a Supreme Court appointed referee who would review and conduct hearings on the disputed claims.

Claimants in this appeal (Major Policyholders) are among the corporate policyholders, headquartered in various states, who have timely submitted proof of claims to the Liquidator. The Major Policyholders have asserted claims against Midland for coverage stemming from exposure to, among other things, asbestos, environmental pollution, product liability, and other toxic torts. They seek to recover a significant percentage of the billions of dollars at stake in this liquidation proceeding. Subsequent to the Major Policyholder's submission of their proof of claims against Midland, the Liquidator determined that some of their claims should be disallowed. Accordingly, the Liquidator furnished the Major Policyholders with NODs in compliance with the court-ordered procedure, and, in turn, the Major Policyholders filed timely objections.

In 2006, the Liquidator, the Major Policyholders, and Midland's reinsurers approached Supreme Court to address their disagreement concerning the Liquidator's decision to disallow certain of the Major Policyholder's claims. One of the disputes between the parties centered on the Liquidator's decision to exclusively apply substantive New York law in making its determination to disallow certain claims of the Major Policyholders. The Liquidator predicated its decision to apply New York law on the Appellate Division's decision in Matter of Midland Ins. Co. [Claim of Lac d'Amiante du Quebec, Ltee] (269 AD2d 50 [1st Dept 2000]) (Midland LAQ). The Major Policyholders disputed the precedential value of the holding in Midland LAQ and argued that, under New York law, the Liquidator cannot legitimately disallow claims without first engaging in a choice-of-law analysis to determine the substantive state law that applies to each policy.

As a result, the parties requested that Supreme Court resolve this issue. Consequently, during the spring of 2006, the parties negotiated and agreed upon a proposed case management order. Supreme Court so-ordered the document, entitled "Stipulation and Case Management Order" (CMO) on July 31, 2006. The CMO set forth a procedure to resolve the legal disputes between the parties, dividing the legal issues into two phases.

The legal issue posed by phase I of the CMO, which is the subject of this appeal, is "whether New York substantive law governs the interpretation and application of Midland insurance polices at issue in this litigation or whether [Supreme Court] must conduct an analysis utilizing New York's choice-of-law test to determine which jurisdiction's or jurisdictions' law(s) apply."

After reviewing memoranda of law submitted by the parties, Supreme Court agreed with the Major Policyholders that the Liquidator erred in automatically applying New York substantive law to every claim submitted. The court held that Certain Underwriters at Lloyd's, London v Foster Wheeler Corp. (36 AD3d 17 [1st Dept 2006], affd for reasons stated below 9 NY3d 928 [2007]) obligated the Liquidator to conduct a threshold analysis of each Midland policy to determine the applicable substantive state law according to the "grouping of contacts" approach of the Restatement (Second) of Conflict of Laws. The court observed:

"On this motion, it cannot be determined whether analysis of the policyholders' denied claims under the Restatement's 'grouping of contacts' approach would have resulted in allowances of their claims. It may be possible for the Liquidator to defend his denial of the [Major Policyholders'] claims even when ...


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