Transit Cas. Co. v. Selective Ins. Co. of Southeast

• Decision Date: 07 April 1998
• Docket Number: No. 97-1090,97-1090
• Citation: 137 F.3d 540
• Parties: TRANSIT CASUALTY COMPANY, Plaintiff/Appellee, v. SELECTIVE INSURANCE COMPANY OF THE SOUTHEAST, Defendant/Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 540

137 F.3d 540

TRANSIT CASUALTY COMPANY, Plaintiff/Appellee, v. SELECTIVE INSURANCE COMPANY OF THE SOUTHEAST, Defendant/Appellant.

No. 97-1090.

United States Court of Appeals,

Eighth Circuit.

Submitted June 11, 1997.

Decided Feb. 18, 1998.

Rehearing and Suggestion for Rehearing En Banc Denied April 7, 1998.

Paula Marie Young, James C. Owen, McCarthy & Leonard, Chesterfield, MO, for Plaintiff-Appellee.

William Edward Quirk, Philip W. Bledsoe, Michael James Elston, Shughart Thomson & Kilroy, P.C., Kansas City, MO, for Defendant-Appellant.

Debra J. Hall, Anthony J. Mormino, Washington, DC, for Amicus Curiae.

Before WOLLMAN, BEEZER ¹ and MURPHY, Circuit Judges. ²

BEEZER, Circuit Judge:

Selective Insurance Company appeals the district court's summary judgment holding that Selective may not offset its debt to Transit Casualty Company against the sums owed by Transit to Selective. The district court held that the contractual right of offset between the parties conflicted with the insolvency clause in the contracts and that granting the offset violated Missouri public policy. Accordingly, the court found that Selective owed the full sum of its obligations to Transit and awarded prejudgment interest. We have jurisdiction over this timely appeal pursuant to 28 U.S.C. § 1291, and we reverse.

I

This case involves two sets of contracts. The first set concerns three retrocession contracts which Transit entered into in 1983, with Fortress Re as the reinsurance underwriting manager on behalf of Selective. ³ Pursuant to these three contracts, Transit has submitted a number of claims that remain unpaid. As of the date of summary judgment in this case, Fortress, on behalf of Selective, owed Transit $183,390.98.

In the second set of contracts, Transit acted as reinsurer for Fortress. Between 1980 and 1985, Transit entered into ten reinsurance contracts with Fortress, acting on behalf of its member companies, one of whom is Selective. Although none of the member companies was named in those contracts, i.e., only Fortress was a signatory, it is undisputed that Fortress acted as Selective's agent in connection with those contracts. ⁴ Under these ten contracts, Transit owes the Fortress companies unpaid claims in the amount of $337,974.68. Selective was a member company for the time period covered by six of the contracts.

Transit went into receivership on December 3, 1985, and liquidation proceedings began in Missouri. Fortress filed claims in the Transit receivership proceeding under each of the ten reinsurance contracts. Eight of these ten claims were allowed by the receiver, for a total amount of $316,364.35. The parties have stipulated both to the amount of money Transit owes under the reinsurance contracts and to Selective's share of that amount; it is undisputed that Transit owes Selective $32,432.23.

The receiver for Transit subsequently brought this action against Selective in Missouri state court seeking recovery of the sums owed by Selective under the three retrocession contracts. Selective removed the action to federal court and pleaded as an affirmative defense that it had a right to offset the sums it owed to Transit against funds owed by Transit to Selective under the ten reinsurance contracts.

The retrocession contracts, under which Transit brought this action against Selective, contain an insolvency provision. The reinsurance contracts, under which Selective claims a right of offset, contain both an insolvency clause and an offset clause.

The district court granted summary judgment in favor of Transit, holding that the insolvency clause conflicted with the set-off clause in the reinsurance contracts, and that upon Transit's insolvency the insolvency clause governed the rights of the parties. The district court further held that the insolvency clause did not grant an inter-contract set-off right and that, even if it did, such a set-off would be contrary to Missouri's Insurance Code and was void.

II

We review the district court's grant of summary judgment de novo. Kiemele v. Soo Line R.R. Co., 93 F.3d 472, 474 (8th Cir.1996). In this diversity case, the interpretation of the insuring agreement is a matter of state law, General Cas. Ins. Companies v. Holst Radiator Co., 88 F.3d 670, 671 (8th Cir.1996), and we review de novo the district court's interpretation of state law. Salve Regina College v. Russell, 499 U.S. 225, 231, 111 S.Ct. 1217, 1220-21, 113 L.Ed.2d 190 (1991).

Selective's appeal presents three issues for resolution: (1) whether the allowance of a set-off violates the Missouri Insurance Code; (2) whether the parties contracted to allow a set-off; and (3) whether Selective is entitled to a set-off in this case. We answer the first question in the negative and the second in the affirmative, and hold that Selective may avail itself of the contractual right of set-off because the parties' obligations were mutual.

A.

The first question presented by Selective's appeal is whether the offset of debts in insolvency violates the Missouri Insurance Code or otherwise violates Missouri public policy. If such a prohibition is discovered, any contractual right of offset is irrelevant. Transit contends that the Missouri Insurance Code constitutes a comprehensive scheme for the resolution of the failed insurer's assets and that the Code does not condone set-offs. Moreover, argues Transit, allowing set-offs would subvert the priority of creditors established in the Code.

Selective, on the other hand, argues that set-offs merely establish the bounds of the pre-receivership assets and that the Insurance Code governs only the distribution of those assets, rather than their definition. We agree with Selective that nothing in the Insurance Code nor in Missouri common law indicates that Missouri rejects the right of parties to contract for a right to offset debts.

In 1892 the Supreme Court held that the right to assert set-off in insolvency was customary both statutorily and as a matter of equity. Indeed, the Court stated that "where the mutual obligations have grown out of the same transaction, insolvency on the one hand justifies the set-off of the debt due upon the other." Scott v. Armstrong, 146 U.S. 499, 507, 13 S.Ct. 148, 150, 36 L.Ed. 1059 (1892). The Court went on to hold that "[w]here a set-off is otherwise valid, it is not perceived how its allowance can be considered a preference, and it is clear that it is only the balance, if any, after the set-off is deducted, which can justly be held to form part of the assets of the insolvent." Id. at 510, 13 S.Ct. at 151.

The Supreme Court of Missouri subsequently dealt with the question of offset in an insurance insolvency proceeding. The Court recognized the right to offset debts, but disallowed the offset because of the lack of mutuality of obligation. Citing Scott v. Armstrong, the Missouri Supreme Court stated that the "right to assert set-off at law is of statutory creation, but courts of equity from a very early day have been accustomed to grant relief in that regard independently as well as in aid of statutes upon the subject." Sturdivant Bank v. Stoddard County, 332 Mo. 568, 58 S.W.2d 702, 703 (1933). Thus, the broad principle of offset in insurance insolvencies has been accepted by Missouri courts. Missouri courts continue to allow offset in contractual disputes. See Greenwood v. Bank of Illmo, 782 S.W.2d 783 (1989); Edmonds v. Stratton, 457 S.W.2d 228 (1970).

The Missouri Insurance Code establishes the priority of creditors in the case of an insurer insolvency. ⁵ This section, along with the remainder of the statute, dictates the order of distribution of the insolvent insurance company's assets at the time the receivership or liquidation order is entered. If, as is contemplated in Scott v. Armstrong, set-off defines the nature of the insolvent's assets, allowing set-off does not subvert the priority of creditors established by statute. Because the Missouri courts have accepted the right of parties to offset debts and have adopted Scott v. Armstrong, we believe that the Missouri Supreme Court would hold that a mutual set-off may constitute a pre-receivership asset that does not subvert the priority of creditors listed in the Insurance Code.

We are aware that the allowance of set-offs affects the nature of the claims allowed:

Whereas the allowance of set-offs furthers some public policies, it may conflict with other public policies that guide the administration of insolvent estates: the prohibition of preferences (the preferential treatment of one creditor over another), and the guarantee of a pro rata distribution of estate assets. There is no question that in some circumstances, the application of set-off principles works to the advantage of one particular creditor, or class of creditors, and to the disadvantage of others. For nearly two thousand years, however, courts and legislatures have resolved the tension between these competing public policies in favor of set-offs.

Stephen W. Schwab et al., Onset of an Offset Revolution: The Application of Set-Offs in Insurance Insolvencies, 95 Dick.L.Rev. 449, 454 (1991). Acknowledging this tension, we hold that parties in Missouri may contract to offset mutual debts.

The allowance of set-off in Missouri insurance insolvencies does not contradict the Missouri Insurance Code and it does not otherwise violate Missouri public policy. There is no indication in Missouri case law that the right to set-off has been rejected. Moreover, to allow set-off aligns Missouri with almost all other states. See id. at App. A. Indeed, since Transit's insolvency, Missouri has enacted a set-off provision, an indication that set-offs likely did not violate public policy prior to the enactment. Mo.Rev.Stat. § 375.1198 (1997).

B.

Given that parties in Missouri are free to contract for a right of set-off, we next consider whether the parties did, in fact, bargain for a right of offset. We hold that the contracts at...