In re Liquidation of Midland Ins. Co..Everest Reinsurance Co.

• Decision Date: 25 August 2011
• Citation: 87 A.D.3d 487,929 N.Y.S.2d 116,2011 N.Y. Slip Op. 06324
• Parties: In re LIQUIDATION OF MIDLAND INSURANCE COMPANY.Everest Reinsurance Company, Appellant–Respondent,v.James J. Wrynn, Superintendent of Insurance of the State of New York, etc., et al., Respondents–Appellants.Baxter International Inc., Intervenor–Respondent.
• Court: New York Supreme Court — Appellate Division

87 A.D.3d 487

929 N.Y.S.2d 116

2011 N.Y. Slip Op. 06324

In re LIQUIDATION OF MIDLAND INSURANCE COMPANY.Everest Reinsurance Company, Appellant–Respondent,

v.James J. Wrynn, Superintendent of Insurance of the State of New York, etc., et al., Respondents–Appellants.Baxter International Inc., Intervenor–Respondent.

Supreme Court, Appellate Division, First Department, New York.

Aug. 25, 2011.

Budd Larner, P.C., New York (Joseph J. Schiavone of counsel), for appellant-respondent.Simpson Thacher & Bartlett, LLP, New York (Barry R. Ostrager of counsel), for Swiss Reinsurance America Corporation, GE Reinsurance Corporation and Westport Insurance Corporation, and Hogan Lovells U.S. LLP, New York (Sean Thomas Keely of counsel), for Clearwater Insurance Company, Metropolitan Group Property and Casualty Insurance Company, and Allianz S.p.A., respondents-appellants.David Axinn, New York, for James J. Wrynn, respondent-appellant.Nixon Peabody LLP, Boston, MA (Joseph C. Tanski, of the bar of the State of Massachusetts, admitted pro hac vice, of counsel), and Nixon Peabody LLP, New York (Barbara A. Lukeman of counsel), for California Insurance Guarantee Association, Connecticut Insurance Guaranty Association, District of Columbia Insurance Guaranty Association, Georgia Insurers Insolvency Pool, Maine Insurance Guaranty Association, Massachusetts Insurers Insolvency Fund, Mississippi Insurance Guaranty Association, New Hampshire Insurance Guaranty Association, Rhode Island Insurers Insolvency Fund, Texas Property & Casualty Insurance Guaranty Association, Vermont Property and Casualty Insurance Guaranty Association, and Virginia Property and Casualty Insurance Guaranty Association, respondents-appellants.Shapiro, Rodarte & Forman LLP, Santa Monica, CA (Cindy F. Forman of counsel), for Baxter International Inc., respondent.SWEENY, J.P., MOSKOWITZ, DEGRASSE, FREEDMAN, RICHTER, JJ.

Order, Supreme Court, New York County (Michael D. Stallman, J.), entered on or about January 15, 2008, which denied the motions of Everest Reinsurance Company to modify an anti-suit injunction and to vacate an order, same court and Justice, entered on or about November 8, 2006, and modified a claims allowance procedure order, same court (Beverly S. Cohen, J.), entered January 31, 1997, unanimously affirmed, without costs. Order, same court (Michael D. Stallman, J.), entered June 2, 2009, which set forth certain procedures for the allowance of claims against Midland Insurance Company, unanimously affirmed, without costs.

By order entered on or about April 3, 1986, Supreme Court (Thomas J. Hughes, J.) placed Midland Insurance Company in liquidation and permanently enjoined the commencement and prosecution of all actions against it ( see Insurance Law § 7419[b] ). Everest Reinsurance Company entered into excess of loss reinsurance treaties and facultative reinsurance certificates with Midland for policy periods in the 1970s and 1980s (collectively, the reinsurance contracts).¹ Claiming that its contractual rights were not being honored, Everest moved the court for an order modifying the injunction so as to permit an action by Everest for a judgment declaring its rights as well as those of the liquidator under the reinsurance contracts. Everest sought leave to sue for a judgment declaring that the liquidator breached the reinsurance contracts by failing to provide Everest with (a) proper information regarding claims, (b) an opportunity to participate in settlement negotiations with Midland policyholders and (c) an opportunity to participate in the claim allowance process. The relief Everest would have wanted to seek in its action was a declaration that it was not required to provide reinsurance for claims affected by the foregoing alleged breaches and a further declaration that Everest has the right to interpose defenses in the liquidator's settlement negotiations and claims allowance processes. On this appeal, Everest argues that the court committed error in denying its motion to modify the injunction.

Insurance Law § 7419(b) vests a liquidation court with broad authority to issue injunctions as it deems necessary to prevent interference with the liquidator or the proceeding, or the waste of the insurer's assets. Accordingly, a court has the unquestioned authority to vacate an anti-suit injunction in the interest of justice ( see Matter of Bean, 207 App.Div. 276, 280, 201 N.Y.S. 827 [1923], affd. 238 N.Y. 618, 144 N.E. 916 [1924] ). A motion for such relief is addressed to the sound discretion of the court ( see Rosemont Enters. v. Irving, 49 A.D.2d 445, 448, 375 N.Y.S.2d 864 [1975] ). One claiming error in the exercise of a court's discretion has the burden of showing an abuse of such discretionary power ( id.). Everest correctly cites Matter of Bean v. Stoddard, 207 App.Div. 276, 201 N.Y.S. 827 [1923], affd. 238 N.Y. 618, 144 N.E. 916 [1924] for the proposition that in a liquidation proceeding a court may vacate an injunction in the interest of justice. “The phrase ‘interest of justice’ implies conditions ‘which assist, or are in aid of or in the furtherance of, justice [and] bring about the type of justice which results when the law is correctly applied and administered’ after consideration of the interests of both the litigants and society” ( Hafkin v. N. Shore Univ. Hosp., 279 A.D.2d 86, 90, 718 N.Y.S.2d 379 [2000], affd. 97 N.Y.2d 95, 736 N.Y.S.2d 291, 761 N.E.2d 1018 [2001][citations omitted] ).

In making its determination, the court found that Everest did not establish a likelihood of its success in proving that the liquidator violated its contractual investigation and interposition rights by refusing to allow Everest to participate in the allowance, disallowance and settlement of claims prior to their submission to the court. The court further noted that Everest will suffer no injury until it is called upon to make payment on claims that the liquidator allows and the court has approved. The court also recognized the public interest in the single management of a liquidation that Insurance Law § 7419(b) is intended to protect. Hence, we conclude that the court gave due consideration to the interest of justice in denying Everest's motion for an order vacating the anti-suit injunction. Although the court misstated Everest's burden on the motion to be proof by a preponderance of the evidence, we also find no abuse of discretion on the basis of the foregoing factors considered by the court.²

We reject Everest's argument that the court erroneously held that Everest's right to interpose defenses attaches only after the liquidator has allowed a claim. Under Insurance Law § 1308(a)(3), a reinsurance agreement may provide that where a claim is pending during an insurer's insolvency proceeding the reinsurer “may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated any defenses which it deems available to the ceding company, its liquidator, receiver or statutory successor.” Moreover, Insurance Law § 7432 and § 7433 provide for the processing of claims by the liquidator while § 7434(a)(1) contemplates the payment of claims upon the recommendation of the liquidator under the direction of the court. Hence, claims are adjudicated after they have been filed with the court.

Everest's claim of a right to interpose defenses at the commencement of a liquidation proceeding is also at odds with the very nature of reinsurance. Even where there is reinsurance, primary insurers are solely responsible for the investigation and defense of claims ( see Unigard Sec. Ins. Co. v. North Riv. Ins. Co., 79 N.Y.2d 576, 583, 584 N.Y.S.2d 290, 594 N.E.2d 571 [1992] ). “The reinsurer does not assume liability for losses paid ...; its only obligation is to indemnify the primary insurer” ( Matter of Midland Ins. Co., 79 N.Y.2d at 258, 582 N.Y.S.2d 58, 590 N.E.2d 1186). The reinsurance contracts involved here contain typical “follow the settlements” or “follow the fortunes” provisions which leave reinsurers little room to dispute the primary insurers' claims handling ( Unigard at 583, 584 N.Y.S.2d 290, 594 N.E.2d 571). By operation of a “follow the settlements” clause, a reinsurer is bound by the settlement or compromise of a claim agreed to by a cedent unless it can show impropriety in arriving at the settlement ( Excess Ins. Co. Ltd. v. Factory Mut. Ins. Co., 3 N.Y.3d 577, 583 n. 3, 789 N.Y.S.2d 461, 822 N.E.2d 768 [2004] ). The reinsured's liability determinations are insulated from the reinsurer's challenge “ ‘unless they are fraudulent, in bad faith, or the payments are clearly beyond the scope of the original policy or in excess of [the reinsurer's] agreed-to exposure’ ” ( Allstate Ins. Co. v. Am. Home Assur. Co., 43 A.D.3d 113, 121, 837 N.Y.S.2d 138 [2007], quoting North Riv. Ins. Co. v. Ace Am. Reins. Co., 361 F.3d 134, 140 [2d Cir.2004], lv. denied 10 N.Y.3d 711, 860 N.Y.S.2d 483, ...