In re Rehab. of Scottish Re (U.S.), Inc.

• Decision Date: 19 May 2020
• Docket Number: C.A. 2019-0175-AGB
• Parties: IN THE MATTER OF THE REHABILITATION OF SCOTTISH RE (U.S.), INC.
• Court: Court of Chancery of Delaware

IN THE MATTER OF THE REHABILITATION OF SCOTTISH RE (U.S.), INC.

C.A. 2019-0175-AGB

COURT OF CHANCERY OF THE STATE OF DELAWARE

May 19, 2020

ORDER GRANTING THE RECEIVER'S MOTION TO DISMISS THE VERIFIED AMENDED PETITION OF PROTECTIVE LIFE INSURANCE COMPANY, PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY, WEST COAST LIFE INSURANCE COMPANY, AND MONY LIFE INSURANCE COMPANY

WHEREAS:¹

A. Protective Life Insurance Company is the parent company of Protective Life and Annuity Insurance Company, West Coast Life Insurance Company, and MONY Life Insurance Company (collectively, the "Protective Entities"). Since 1972, one or more of the Protective Entities have entered into or assumed approximately 60 reinsurance agreements under which Scottish Re (U.S.), Inc. ("Scottish Re") reinsures a portion of their life insurance policies.² The Protective Entities also have agreements with third-party life insurers under which they coinsure and administer third-party business reinsured with Scottish Re.³

B. Beginning in February 2016, Scottish Re sought to increase the reinsurance premium rates on some of the reinsurance treaties. The Protective Entities disputed Scottish Re's right to do so. At this time, Scottish Re had fallen behind on reimbursing the Protective Entities for claims paid.⁴

C. After negotiating for nearly two years, Scottish Re and each of the Protective Entities entered into a global settlement on January 31, 2018, which resolved the rate dispute and a number of other issues (the "Settlement Agreement").⁵ Of particular importance to the pending petition, Section 8 of the Settlement Agreement addresses the issue of offsets:

Offset. The Parties agree that reinsurance premium and undisputed claims may be offset on any reinsurance treaty between Protective and SRUS, or on any treaties involving business coinsured with Protective, for balances incurred on or after the Effective Date.⁶

D. On March 6, 2019, the court entered the Rehabilitation and Injunction Order, placing Scottish Re into Rehabilitation under 18 Del. C. §§ 5903 and 5905, appointing the Honorable Trinidad Navarro, Insurance Commissioner of the State of Delaware, as Receiver for Scottish Re (the "Receiver"), and entering certain injunctive relief under 18 Del. C. § 5904.⁷

E. On March 25, 2019, the Receiver filed a petition for approval of a plan for addressing contractual offset rights during the rehabilitation proceeding.⁸

F. On April 16, 2019, the Protective Entities submitted "Asserted Offset Claims" to the Receiver under the Receiver's then-proposed offset plan. The Receiver objected to those "Asserted Offset Claims" because the calculations involved "triangular"⁹ or "cross-entity" offsets, i.e., "offsetting premium due by one Protective Entity against the reimbursed claims owed to a different Protective Entity."¹⁰ According to the Receiver, Section 8 of the Settlement Agreement does not authorize this group offsetting methodology, but instead requires mutuality such that amounts due to the Receiver by one Protective Entity may only be offset by amounts the Receiver owes that same entity. The Receiver acknowledges, however, that Section 8 provided the Protective Entities with a broader right of offset by allowing them to take offsets—albeit individually—relating to the two types of reinsurance they had with Scottish Re, i.e., yearly renewable term reinsurance and coinsurance.¹¹

G. On June 20, 2019, after a hearing and submission of a revised proposed plan, the court approved the Receiver's revised offset plan ("Offset Plan").¹²

H. On July 10, 2019, the court approved a stipulation by the Receiver and the Protective Entities under which the Receiver agreed to certain offsets but continued to object to the group offsetting methodology.¹³

I. On August 5, 2019, the Protective Entities filed their initial petition,¹⁴ which they amended on October 28, 2019 (the "Petition"). The Petition was filed under Section III(C)(1) of the Offset Plan, which provides that in the event there is a dispute regarding offsets, "either party may file a petition with the Court for a determination as to the Offset Amount or other appropriate relief."¹⁵ The Petition seeks "an order directing the Receiver to honor valid contractual obligations of Scottish Re . . . by allowing offset or recoupment of premium and claims payments pursuant to . . . [the] Settlement Agreement."¹⁶

J. On December 13, 2019, the Receiver filed his motion to dismiss the Petition for failure to state a claim under Court of Chancery Rule 12(b)(6).¹⁷

NOW THEREFORE, the court having considered the parties' submissions, IT IS HEREBY ORDERED, this 19^th day of May, 2020, as follows:

1. The standard governing a motion to dismiss under Court of Chancery Rule 12(b)(6) for failure to state a claim for relief is well-settled:

(i) all well-pleaded factual allegations are accepted as true; (ii) even vague allegations are "well-pleaded" if they give the opposing party notice of the claim; (iii) the Court must draw all reasonable inferences in favor of the non-moving party; and ([iv]) dismissal is inappropriate unless the "plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances susceptible of proof."¹⁸

2. As the Receiver has acknowledged, "[i]t is commonplace in [Scottish Re's] business relationships with cedents, retrocessionaires, and third party administrators to sometimes use offsets as an accounting method or shorthand to 'net' mutual rights and obligations between them."¹⁹

3. In March 2019, at the outset of this action, the court entered the Rehabilitation and Injunction Order, paragraph 12 of which temporarily enjoined reinsurers and cedents of Scottish Re from exercising their contractual offset rights:

All persons or entities, including but not limited to reinsurers and cedents, having notice of these proceedings or of the Rehabilitation and Injunction Order are hereby enjoined and restrained from exercising or relying upon any contractual right which would permit such third party or parties from withholding, failing to pay, setting-off, netting, or taking similar action with respect to any obligations owed to [Scottish Re].²⁰

4. Section 5927 of the Delaware Uniform Insurers Liquidation Act ("DUILA"), which governs insurance insolvencies in Delaware, recognizes the use of offsets in a rehabilitation proceeding under limited circumstances. This section provides, in relevant part, that:

(a) In all cases of mutual debts or mutual credits between the insurer and another person in connection with any action or proceeding under this chapter, such credits and debts shall be set off and the balance only shall be allowed or paid, except as provided in subsection (b) of this section below. . . .²¹

In June 2019, the court approved the Offset Plan, which was designed to provide a process by which the Receiver would review asserted offsets and authorize those that comply with this statutory requirement during the pendency of this proceeding until a viable rehabilitation plan is submitted and approved by the Court.

5. The Protective Entities argue that the Receiver erred in denying them offsets according to their group offsetting methodology because: (i) the plain language of the Settlement Agreement authorizes that methodology; (ii) the Settlement Agreement itself creates mutual obligations that satisfy the mutuality requirement of 18 Del. C. § 5927; (iii) the Settlement Agreement satisfies the integrated transaction requirement for recoupment; and (iv) the Receiver must permit the Protective Entities to exercise their right of offset because Section 8 of the Settlement Agreement is part of an executory contract that the Receiver is obligated to accept or reject in its entirety.²²

6. For the reasons discussed below, the court does not need to determine whether the Settlement Agreement authorizes the group offsetting methodology advocated by the Protective Entities because even if it did, (i) the methodology is prohibited by 18 Del. C. § 5927, which requires mutuality, (ii) the Settlement Agreement does not satisfy the single transaction requirement of recoupment, and (iii) the Receiver does not have an obligation to accept or reject all provisions of the Settlement Agreement at this point in the proceeding.

7. Mutuality. Both parties agree that the mutuality requirements for offsets must be strictly construed.²³ In the bankruptcy context, "state and federal courts have found to a fare-thee-well that debts are mutual only when they are due to and from the same persons in the same capacity."²⁴ Thus, "[m]utuality requires that 'each party must own his claim in his own right severally, with the right to collect in his own name against the debtor in his own right and severally.'"²⁵

8. Implicitly conceding that mutuality is lacking under their reinsurance contracts with Scottish Re because the Protective Entities have separate rights and obligations under those contracts, the Protective Entities argue that the Settlement Agreement itself creates the required mutuality under Section 5927 of the DUILA.²⁶

9. For support, the Protective Entities rely on In re Liquidation of Home Insurance Company²⁷ to argue that an offset among affiliates is permissible "where the intent of all the parties to permit such an offset is clear."²⁸ Home Insurance, however, involved the absolute assignment of one affiliate's rights to a claim to another affiliate.²⁹ "For an assignment to be absolute, '[t]he assignor must not retain any control over the fund or property assigned, any authority to collect, or any form of revocation.'"³⁰ The court in Home Insurance recognized that "[s]uch an assignment 'can create mutuality for setoff purposes,'" explaining that:

Under principles of contract law, when party A pays B's debt to C and obtains a valid assignment of C's rights against B, party A may now "step into the shoes" of C and assert all rights C had against B. By way of assignment, there are mutual debts now owing between p

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