In re Pemaquid Underwriting Brokerage, Inc., Bankruptcy No. 04-19537 MS.

• Decision Date: 12 January 2005
• Docket Number: Adversary No. 04-2402 MS.,Bankruptcy No. 04-19537 MS.
• Citation: 319 B.R. 824
• Parties: In re PEMAQUID UNDERWRITING BROKERAGE, INC., Debtor. Pemaquid Underwriting Brokerage, Inc., United Messenger Courier Program and John T. Simon, Plaintiffs, v. D & H Alternative Risk Solutions, Inc., Valley National Bank, Cunningham Lindsey Claims Management, Inc., and XYZ Corp. (fictitious entities), Defendants, v. Legion Insurance Company (in liquidation), Interpleader Defendant.
• Court: U.S. Bankruptcy Court — District of New Jersey

Page 824

319 B.R. 824

In re PEMAQUID UNDERWRITING BROKERAGE, INC., Debtor.

Pemaquid Underwriting Brokerage, Inc., United Messenger Courier Program and John T. Simon, Plaintiffs, v. D & H Alternative Risk Solutions, Inc., Valley National Bank, Cunningham Lindsey Claims Management, Inc., and XYZ Corp. (fictitious entities), Defendants, v. Legion Insurance Company (in liquidation), Interpleader Defendant.

Bankruptcy No. 04-19537 MS.

Adversary No. 04-2402 MS.

United States Bankruptcy Court, D. New Jersey.

January 12, 2005.

COPYRIGHT MATERIAL OMITTED

Andrew L. Indeck, Esq., Scarinci & Hollenbeck, LLC, Lyndhurst, NJ, Attorneys for Plaintiffs, Trustee for Pemaquid Underwriting Brokerage, Inc., United Messenger Courier Program and John T. Simon.

Charlotte E. Thomas, Esq., Wolf, Block, Schorr and Solis-Cohen, LLP, Cherry Hill, NJ, Attorneys for Interpleader Defendant, M. Diane Koken, Insurance Commissioner of the Commonwealth of Pennsylvania as Statutory Liquidator of Legion Insurance Company and Villanova Insurance Company.

OPINION

MORRIS STERN, Bankruptcy Judge.

Here, the substantive question on cross-motions for summary judgment is the ownership of certain bank accounts (the "Imprest Accounts"). These accounts are claimed, on the one hand, by the Chapter 7 bankruptcy trustee of a debtor-insurance broker and a partnership comprised of that broker and another nondebtor, and, on the other hand, by the Commissioner of Insurance of the Commonwealth of Pennsylvania, as liquidator of the defunct Legion Insurance Company.

In a turnabout from more familiar fact patterns, sub judice it is the trustee in bankruptcy who asserts that the bank accounts at issue were only nominally Legion's (now only nominally in the estate to be liquidated by the Commissioner). As the trustee would have it, the equitable interest in the accounts belonged to Pemaquid and the partnership. The Imprest Accounts, by this contention, would become property of the bankruptcy estate per 11 U.S.C. § 541(a) (to be then allocated between the estate and the partnership which includes the debtor). Equitable remedy is sought by the trustee and his co-plaintiffs, including the imposition of trust concepts. They also assert contractual entitlement. The Commissioner resists, arguing that her estate in liquidation pursuant to Pennsylvania law and her appointment by the Commonwealth Court includes the Imprest Accounts, which were plainly opened in Legion's name and were under its control.

This adversary proceeding originated as a civil action in the Superior Court of New Jersey. Plaintiffs, Pemaquid Underwriting Brokerage, Inc. (now the debtor in an ongoing Chapter 7 case), United Messenger Courier Program (United, purported to be a partnership of Pemaquid and John T. Simon), and Simon, filed their complaint on January 19, 2004. Plaintiffs sought a determination of rights to the Imprest Account balances,¹ but did not name Legion or the Commissioner as defendants. Instead, certain intermediaries with operational access to the accounts were the original defendants.² One defendant then interplead by both counterclaim and third-party complaint (which brought the Commissioner into the case as Legion's liquidator).³

On March 22, 2004, the debtor filed its bankruptcy petition. Pursuant to 28 U.S.C. § 1452, the trustee filed a Notice of Petition of Removal on or about June 18, 2004. The proceeding was then referred to this Court by the District Court.⁴ This Court has jurisdiction, as well, in accordance with 28 U.S.C. § 1334 and the Standing Order of Reference of the United States District Court of New Jersey dated July 23, 1984. The parties contend that this is a core proceeding within the meaning of 28 U.S.C. § 157(b)(1) (see 28 U.S.C. § 157(b)(2)(A)(E) and (O)). They have stipulated and agreed that it should be treated as core. Given that stipulation and this Court's conclusion that, as a minimum, the proceeding is "related to a case under title 11" per 28 U.S.C. § 1334(b), this Court will enter judgment.

Summary judgment is appropriate in this case. Basic facts are not in dispute, though conclusions to be drawn from a volume of contracts are at issue. A substantial documentary record, including contracts and certifications, has been developed. Judgment can be rendered on the record, since questions of law can be decided on either undisputed facts or facts read most favorably against the successful judgment proponent. Triable issues are thus obviated. See FED.R.CIV.P. 56 and FED. R. BANKR.P. 7056.

Facts

The Pemaquid-Legion relationship drew the other named defendants into this proceeding. It also implicated offshore enterprises, one of which was the parent of the domestic insurer, Legion. That Bermuda-based parent, Mutual Holdings Bermuda Ltd. ("MH" or "Mutual"), has offshore subsidiaries which include workers compensation reinsurers Mutual Indemnity Ltd. of Hamilton, Bermuda ("MB") and Mutual Indemnity (Barbados) Ltd. of Bridgetown, Barbados ("MBar").

In simplest terms, the "rent-a-captive" program implicating Pemaquid, Legion and others was a device by which Pemaquid and United could "bundle" their clients as insureds, and cover those clients with law/regulation compliant workers compensation insurance through a duly licensed insurer, which in turn would look for coverage to its offshore reinsurer — while Pemaquid held the reinsurer harmless with respect to the ultimate risk of underwriting losses. Pemaquid and United, rather than the licensed insurer, were to garner any underwriting profit. The insurer and reinsurer were to receive commissions. The business initiators (again, Pemaquid and United) were to indemnify the offshore reinsurer against underwriting loss. Theoretically, premiums would account for all claim payments, program expenses and commissions, and the remaining profit (including a share of the investment income on the pooled premium-generated funds) would inure to the business initiators. Hence, the risk-reward characteristics of insurance would be reversed as between the licensed insurer (now a "captive") and the broker/agent. Of course, much of the mechanics of such a reversal of interests was designed to achieve technical compliance with applicable insurance regulation which, among other requirements, plainly dictates that insureds be protected.

Thus, from Pemaquid's perspective the arrangement had its regulated and more conventional insurance attributes (referred to here for convenience as the "Insurance Mechanics"), and its investment attributes ("Investment Mechanics").

As to the Insurance Mechanics, the fundamental document was the Legion-issued workers compensation policy (the "Policy" or "Policies") covering insureds produced by Pemaquid as broker and/or agent. Accordingly, pursuant to a certain Management Agreement (D3, Exhibit F) (the "MA"),⁵ Pemaquid was appointed Legion's manager to procure, underwrite and service "Worker's Compensation and Employer's Liability written under the New Jersey Workers' Compensation Safety Group Pool Program" (MA, Section 2A).

Pemaquid had no claims authority (MA, Section 4C) and no capacity to "bind reinsurance or retrocession" on behalf of Legion (MA, Section 4D). Pemaquid served as an independent contractor with no employee/employer relationship with Legion (MA, Section 24). It was not authorized to appoint a "sub-managing general Manager" (MA, Section 4H). Pemaquid was required to remit all premiums to Legion, whether collected or not (MA, Section 9A), and to hold the premiums in a fiduciary capacity for Legion. The manager thus had no interest in the premiums, and was to make no deduction from them other than for Pemaquid's commission (MA, Section 9D). In addition, Pemaquid was required to refund the proportionate share of its commission on canceled policies or reduced premiums (MA, Section 17B).⁶

The Insurance Mechanics also included the Brokerage Agreement between Legion and Pemaquid (D3, Exhibit G) (the "BA") with multiple Addenda showing the remuneration due Pemaquid from Legion for contract years beginning February 1, 1996 and extending through February 2, 2001. As a broker, Pemaquid was "a representative of the Insured and not the agent or representative of Legion" (BA, Section C). Like the Management Agreement, the Brokerage Agreement also required Pemaquid to "remit to Legion all premiums whether or not collected" (BA, Section B1) and allowed Pemaquid a commission on premiums (BA, Section D).⁷

The Reinsurance Agreement (the "RA") was another fundamental of the Insurance Mechanics. This was a preexisting agreement between Legion as insured and its offshore affiliate reinsurers, MB and MBar. It was dated September 8, 1988, effective January 1, 1988 (D5, Exhibit 1, Subexhibit C). The agreement refers to MB and MBar as a single party, "the reinsurer." Per the RA, Legion was permitted to cede to the reinsurer "a portion of [Legion's] liability" attributable to the Policies. This type of reinsurance is known in the industry as a "treaty." See North River Ins. Co. v. CIGNA Reins. Co., 52 F.3d 1194, 1199 (3rd Cir.1995). The reinsurer received a premium for this undertaking, which in RA terms is the "Net Premium Paid" (Article II 5); the parties agree that it was Policy premium net of certain commissions and other deductions which flowed "upstream" from Legion to the reinsurers (D15 ¶ 12 and D5 ¶ 12 and 13). "Downstream" flow necessary to meet the ceded liability obligations was provided for by the RA as follows (Article IV 1):

[Legion] will, with funds to be provided by the Reinsurer, establish and maintain a Paid Loss Deposit Fund, the purpose of which is to provide a source of funds for payment of the Reinsurer's liability under this Agreement.

The Paid Loss Deposit Fund was to be maintained generally in an amount equal to an average two months' paid losses. ("Paid losses" were those paid by Legion, Article II 3.) The reinsurer's liability followed that of Legion; that is, all...