IN RE PETITION OF BD. OF DIRECTORS OF HOPEWELL

Decision Date19 August 1999
Docket NumberBankruptcy No. 98 B 45440(TLB).
Citation238 BR 25
PartiesIn re Petition of the BOARD OF DIRECTORS OF HOPEWELL INTERNATIONAL INSURANCE LTD., as Scheme Administrators of Hopewell International Insurance Ltd., Debtor in Foreign Proceedings.
CourtU.S. Bankruptcy Court — Southern District of New York
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Chadbourne & Parke L.L.P., New York City, by Howard Seife, Peter R. Chaffetz, Steven C. Schwartz, Johnathan F. Bank, for the Board of Directors of Hopewell International Insurance Ltd.

Cozen and O'Connor, Philadelphia, Pennsylvania, by Stephen A. Cozen, Richard M. Mackowsky, Neal D. Colton, David M. Doret, for Gold Medal Insurance Company.

Howard Smith & Levin L.L.P., New York City, by David W. Haller, Adam B. Siegel, for General Mills, Inc.

Seward & Kissel, New York City, by Ronald L. Cohen, Mark D. Kotwick, Charles M. Miller, for General Mills, Inc.

Zelle Larson & Hoffmann L.L.P., Minneapolis, Minnesota, by Lawrence Zelle, Richard L. Voebel, Lawrence T. Hoffmann, for General Mills, Inc.

OPINION ON MOTION FOR INJUNCTIVE RELIEF PURSUANT TO 11 U.S.C. § 304

TINA L. BROZMAN, Chief Judge.

Having voted in favor of and failed to object to a Bermuda court's sanctioning of a reinsurance company's scheme of arrangement, the "captive"1 insurer of General Mills, Inc. ("General Mills"), joined by its insured, now asks this court to deny under § 304 of the Bankruptcy Code injunctive relief2 in aid of that scheme primarily on the theory that it impermissibly requires arbitration of disputed claims in Bermuda, under Bermuda law—pursuant to the International Conciliation and Arbitration Act of 1993 which adopted the model law promulgated by the United Nations Commission on International Trade Law ("UNCITRAL")—rather than under the law and in the place called for by the captive's reinsurance contract, Minnesota. In addition, the captive asks that I refuse to extend an injunction which the Bermuda court entered preventing the captive from enforcing against the reinsurer or its property any liability of the captive to its insured once that claim is determined or settled. That injunction was entered because the captive had candidly disclosed its intention to proceed with litigation against the reinsurer in the United States, despite the ban on such litigation contained in the scheme. The captive says it is entitled to ignore the scheme because of a variety of defects with which it is plagued. To dodge the consequences of its obvious default to point out to the Bermuda court just what it now claims was wrong with the scheme, or to appeal from the order of sanction, the captive suggests that a board of directors appointed as scheme administrators cannot be a foreign representative under § 304 and that a scheme, once sanctioned, cannot be granted comity because the court file is closed. I feel constrained to ask why, if a board of directors can be a chapter 11 debtor in possession whom we expect to be recognized as such abroad, can't a board of directors be scheme administrators recognized as such here? As to the second argument, the short answer is that it makes little sense to grant comity to proceedings where a scheme has not yet been sanctioned but to refuse to grant comity in furtherance of a scheme having received judicial scrutiny and approval, simply because the case technically has been closed even though the scheme's ends have yet to be accomplished.

I.
A. Background
1. The Parties

Hopewell International Insurance Ltd. ("Hopewell") is a Bermuda reinsurance company that reinsured captive insurers ("captive-cedents" or "reinsureds") owned by major industrial companies here and overseas. Transcript of Trial Testimony of Kieran Kerr, dated October 13, 1998, at page 880, to be referred to as "Kerr at ___."3 Among Hopewell's captive-cedents is Gold Medal Insurance Company ("Gold Medal"), the captive insurer of General Mills. It is Gold Medal and General Mills who challenge the propriety of (i) the nationwide injunctive relief which Hopewell seeks from this court, specifically, an injunction preventing Gold Medal and all other scheme creditors from commencing any arbitration or judicial proceedings or enforcing any arbitral award or judgment against Hopewell or its property and (ii) this court's granting comity to and thus extending an injunction issued by the Bermuda court preventing Gold Medal from commencing any action or proceeding, enforcing any arbitral award or judgment against Hopewell or attaching any of its assets located in the United States.

2. How Hopewell Operated

Hopewell did not retain all of its own risk but reinsured or "retroceded" approximately 95% of that risk with entities known as "retrocessionaires" who participated in Hopewell's yearly Basic Treaty and other retrocessional facilities that supported the Basic Treaty (all together the "Retrocession Treaties"). Kerr at 882-85. To accomplish this, Hopewell entered into yearly contracts with the retrocessionaires obligating them to pay to Hopewell specified percentages of losses which Hopewell was called upon to pay its reinsureds. Hopewell's retrocessionaires included well-known professional reinsurers such as "Swiss Re," "SCOR," "Zurich" and "Hanover" as well as certain of its own captive-cedents. Transcript of Trial Testimony of Graham Denys Brice, dated November 3, 1998, and November 11, 1998, at page 1196, to be referred to as "Brice at ___."4 In a sense, Hopewell's captive-cedents looked to the creditworthiness of the retrocessionaires inasmuch as they had assumed the lion's share of Hopewell's risk. If, however, a retrocessionaire were to become insolvent or otherwise fail to pay, Hopewell alone was responsible for the shortfall to its reinsureds. Kerr at 886. So Hopewell bore the risk not only of its 5% retention but of the failure of a retrocessionaire to honor its obligations. Brice at 1202-03.

Until 1995, when it entered "run-off," that is, the cessation of assuming new risk and the winding-down of its existing business, Hopewell acted primarily as a property reinsurer. Kerr at 881. However, for a period in the 1970s it also accepted casualty risks, including losses from pollution. Kerr at 881. Indeed, it was the casualty risks which, in the 1990s, became a growing concern for Hopewell's board of directors and ultimately contributed in large part to the decision to put Hopewell into run-off.

Among Hopewell's captive-cedents were its shareholders, each of which had a seat on Hopewell's board of directors. Kerr at 880. The company had no employees but contracted with International Risk Management Group ("IRMG"), a subsidiary of Swiss Re, for the provision of management services. Kerr at 877-78, 937.

Hopewell was not alone in having no employees. Most of its reinsureds had no claims departments either and contracted with IRMG, through IRMG's affiliate known as Global Claims Services, to provide claims handling services. Kerr at 888-89. Since IRMG was on both sides of submitted claims, managing Hopewell, the reinsurer, on the one hand, and providing claims handling services to Hopewell's reinsureds, on the other, typically, Global Claims Services would appoint an independent loss adjuster to make reserving and payment recommendations to the captive-cedent. Brice at 1248-49. Hopewell relied on these recommendations to set case reserves and approve claims for payment although Hopewell, on its own, set reserves for legal fees on disputed claims. Kerr at 891, 893-94; Brice at 1252, 1256-57.

3. The "Pesticide Incident"

In June, 1994, General Mills first disclosed to Hopewell that a contractor had applied an unapproved pesticide to a substantial quantity of oats. That same year, General Mills retained an attorney by the name of Lawrence Zelle of Zelle & Larson to attempt to establish coverage for the loss, General Mills' largest property loss ever, under General Mills' insurance policies, including policies Gold Medal reinsured through Hopewell.

Through Global Claims Services, Gold Medal appointed the Thomas Howell Group, U.S.A. to be the independent claims adjuster for the loss. It also retained the law firm of Cozen and O'Connor to analyze the coverage issues. Because all the directors of Gold Medal were either officers or directors of General Mills, IRMG requested that both companies appoint an "independent loss representative" to assume decision-making authority for Gold Medal with respect to this loss. Brice at 1249; Transcript of Trial Testimony of John Weddle, dated November 11, 1998, at page 1550, to be referred to as "Weddle at ___."5 The following July (in 1995), Mr. Lee Troske was retained in that capacity. Based on his opinion, Gold Medal denied coverage. Litigation between General Mills and its captive eventually ensued.

From July 1994 to May 1995, Global Claims Services reported periodically to Hopewell regarding General Mills' progress toward presenting a claim to Gold Medal. Brice at 1246-47. By mid-May 1995, Hopewell was aware that General Mills had submitted a formal claim in the amount of $219 million to Gold Medal and that a proof of loss with respect to the loss of oat grain alone had been submitted to Gold Medal in the amount of $29 million. See Gold Medal Exhibit 3, Affidavit of Jerry R. Simmons, ¶¶ 8-12; Brice at 1288, 1303. However, at the instruction of Cozen and O'Connor, which did not want any evaluation of General Mills' loss to be discoverable in the litigation which was contemplated, Gold Medal did not file a claim with Hopewell based on the Pesticide Incident nor did the independent loss adjuster submit a reserve recommendation to Hopewell. Brice at 1302. Rather, the independent adjuster transmitted General Mills' proof of loss "without comment." As a result, Hopewell did not establish a case reserve on account of the Pesticide Incident. Brice at 1252, 1256, 1283, 1286-87,...

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