General Electric Co. v. Lines
| Decision Date | 18 August 2009 |
| Docket Number | 20063106BLS1 |
| Citation | 09 MBAR 0210 |
| Parties | The General Electric Company v. David E.W. Lines et al.[1] |
| Court | Massachusetts Superior Court |
Judge (with first initial, no space for Sullivan, Dorsey, and Walsh): Hinkle, Margaret R., J.
Plaintiff General Electric ("GE") filed this action against the defendant joint liquidators of Electric Mutual Liability Insurance Company, Limited, formerly known as Electric Mutual Liability Insurance Company ("EMLICO"), alleging breach of contract from EMLICO's refusal to defend and indemnify GE with respect to liability for environmental contamination at 103 sites located in 32 states and Puerto Rico. OneBeacon America Insurance Company ("OneBeacon") was allowed to intervene as a defendant in this action and filed three counterclaims against GE. This matter is before the court on GE's motion for summary judgment on OneBeacon's third counterclaim under Mass.R.Civ.P. 56. For the reasons discussed below, after a hearing, GE's motion for summary judgment is allowed.
EMLICO was organized in Massachusetts as a mutual insurance company in December of 1927. EMLICO was owned by its policyholders and GE was at all times EMLICO's principal corporate policyholder and primary stockholder. GE purchased numerous primary general liability insurance policies from EMLICO between 1959 and 1967. From 1959 to 1967, Employers Surplus Lines Insurance Company, the predecessor to Commercial Union ("CU"), issued a series of reinsurance contracts to EMLICO which reinsured a significant portion of EMLICO's liability to GE. CU also issued reinsurance contracts to EMLICO between 1975 and 1979. The Reinsurance Contracts obligate CU to indemnify and reimburse EMLICO for losses EMLICO pays on its coverage obligations to GE.
Beginning in the 1960s, GE incurred liability to state and federal environmental agencies for contamination at 103 sites located in 32 states and Puerto Rico. EMLICO refused to indemnify GE or reimburse for its costs of defending against such liability. EMLICO and GE conducted non-binding arbitration proceedings between 1985 and 1991 and reached a settlement with respect to environmental contamination claims at seven sites. In 1992, EMLICO presented reinsurance claims to CU in connection with GE's claims, but CU rejected them.
In May of 1995, EMLICO and CU entered into binding arbitration proceedings before a three-member panel ("the Panel") to determine the scope and extent of CU's liability to EMLICO under the Reinsurance Contracts. GE was not a party to these proceedings. In June of 1995, EMLICO redomesticated to Bermuda with the approval of the Massachusetts Commissioner of Insurance ("the Commissioner") and the Bermuda Minister of Finance and Bermuda Registrar of Companies. The Commissioner granted approval based on the conclusion that nothing indicated that EMLICO was insolvent or intended to pursue liquidation upon arrival in Bermuda.
EMLICO registered as a Bermuda insurer and became known as Electric Mutual Liability Insurance Company, Limited.[2] On October 20, 1995, EMLICO filed a winding-up petition in the Supreme Court of Bermuda. The Bermuda court appointed defendants David E.W. Lines, Christopher Hughes and Peter C.D. Mitchell as liquidators (collectively, "the Joint Liquidators") for EMLICO.
In 1997, the Panel divided the EMLICO/CU arbitration into three phases: Phase I to resolve CU's claim for rescission of the Reinsurance Contracts on the ground that EMLICO breached the contracts in bad faith by colluding with GE to redomesticated in Bermuda in order to maximize its reinsurance recovery against CU; Phase II to resolve the issue of reinsurance coverage for EMLICO's liability to GE with respect to asbestos claims, and Phase III to resolve the issue of reinsurance coverage for EMLICO's liability to GE with respect to environmental contamination claims.
Over a two-year period, the Panel held more than 60 days of evidentiary hearings on Phase I of the proceedings. On October 31, 2001, the Panel issued an order in Phase I denying CU's request for rescission of the Reinsurance Contracts as follows:
While the Panel is in unanimous agreement that:
The Panel clarified its order by letter dated January 26, 2002 as follows:
When the Panel stated that it was the "final adjudicator" and that CU was "no worse off" its intent was that since the ultimate economic impact of the overall dispute between EMLICO and CU is to be decided by the Panel as part of this arbitration, the Panel will be in a position in later phases to adjust for any differences that may have resulted from the deceitfully obtained change of jurisdiction from Massachusetts to Bermuda. By this process when the arbitration is completed, CU will end up in the same position as it would have been in had there been no redomestication.
Thereafter CU filed a petition in the United States District Court for the Southern District of New York to confirm the Panel's finding of fraud but vacate that part of the order which denied the rescission claim, arguing that public policy precluded the court from allowing EMLICO to enforce its fraudulently obtained rights under the Reinsurance Contracts. On December 18, 2002, the Southern District affirmed the Panel's order in its entirety. See Commercial Union Ins. Co. v. Lines, 239 F.Supp.2d 351, 356 (S.D.N.Y. 2002). CU appealed that decision to the Court of Appeals for the Second Circuit, arguing that EMLICO's redomestication to take advantage of more favorable liquidation procedures prejudiced CU's rights in the arbitration. On June 19 2003, the Panel issued a decision in Phase II, awarding EMLICO/the Joint Liquidators more than $36 million, representing CU's share of paid asbestos losses.
In an order dated August 5, 2004, the Second Circuit vacated the District Court's order and remanded the matter to the District Court to address whether liquidation in Bermuda could affect the results of the arbitration and whether confirming the award would violate the court's equitable principles. See Commercial Union Ins, Co. v. Lines, 378 F.3d 204, 209-10 (2d Cir. 2004).
GE filed this action against the Joint Liquidators on July 21, 2006. CU's successor, OneBeacon, was allowed to intervene as a defendant to interpose any available defenses to GE's claims on behalf of EMLICO. OneBeacon asserted three counterclaims against GE. OneBeacon's first counterclaim seeks a declaration that the policies are subject to rescission because the parties had an understanding that the policies did not cover environmental contamination, and GE failed to disclose facts regarding its intent to seek environmental contamination coverage and failed to provide environmental loss or exposure information which EMLICO could use to assess accurately the degree and character of risk it was assuming. The second counterclaim seeks a declaration that coverage is barred by GE's constructive fraud in seeking to repudiate the parties' mutual understanding and agreement that the EMLICO policies did not provide coverage for environmental claims. The third counterclaim seeks a declaration that GE is not entitled to coverage because it breached its fiduciary duty to EMLICO as its sole corporate and dominant policyholder and principal owner by installing David St. Laurent as President of EMLICO and persuading him to discontinue the non-binding arbitration, repudiate the position that the policies did not cover environmental contamination, and enter into seven site settlements. The third counterclaim also alleges breach of fiduciary duty arising out of EMLICO's redomestication from Massachusetts to Bermuda.
On January 15, 2007, the Supreme Court of Bermuda granted the Joint Liquidators' request to litigate GE's environmental contamination claims against EMLICO in Massachusetts. This was the resolution repeatedly demanded by CU to return it to the same position it would have been in but for EMLICO's redomestication.
Upon remand in the arbitration case, the District Court (Griesa J.) held an 11-day evidentiary hearing. In a decision and order dated May 30, 2008, Judge Griesa found that the essential change resulting from the redomestication was that the Joint Liquidators took over EMLICO's position rather than the Massachusetts Insurance Commissioner. See Commercial Union Ins. Co. v. Lines, 2008 WL 2234634 at *7 . With respect to Phase II of the proceedings, the court found that EMLICO owed a fiduciary duty to both its reinsurers and to GE as the insured. Id. The court concluded that the Joint Liquidators were obligated to consider the factual and legal positions urged by both sides and to take a stand in accordance with what they believed to be the best supported position. Id. at *8. The court found that the Joint Liquidators were persons of the highest integrity and expertise, that GE never had an intention to control the Joint Liquidators, and that the Joint Liquidators did not allow themselves to be controlled by GE. Id. The court further found that all the Joint Liquidators'...
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