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

• Decision Date: 18 April 2022
• Docket Number: C.A. No. 2019-0175-JTL
• Parties: In the MATTER OF the Rehabilitation of SCOTTISH RE (U.S.), INC.
• Court: Court of Chancery of Delaware

274 A.3d 1019

In the MATTER OF the Rehabilitation of SCOTTISH RE (U.S.), INC.

C.A. No. 2019-0175-JTL

Court of Chancery of Delaware.

Date Submitted: January 20, 2022

Date Decided: April 18, 2022

Peter B. Ladig, GianClaudio Finizio, BAYARD, P.A., Wilmington, Delaware; Diane J. Bartels, Wilmington, Delaware; James J. Black, III, Jeffrey B. Miceli, Mark W. Drasnin, BLACK & GERNGROSS, P.C., Philadelphia, Pennsylvania, Counsel for The Honorable Trinidad Navarro, Receiver for Scottish RE (U.S.), Inc.

Michael Busenkell, GELLERT SCALI BUSENKELL & BROWN, LLC, Wilmington, Delaware, Counsel for Scottish RE (U.S.), Inc.

Marisa R. DeFeo, Randall S. MacTough, SAUL EWING ARNSTEIN & LEHR LLP, Wilmington, Delaware, Counsel for Lincoln National Life Insurance Company, Lincoln Life and Annuity Company of New York and First Penn Pacific Life Insurance Company.

Christopher Viceconte, GIBBONS P.C., Wilmington, Delaware, Counsel for AXA Equitable Life Insurance Company, MONY Life Insurance Company of America, MONY Life Insurance Company of the Americas, LTD., and U.S. Financial Life Insurance Company, Manhattan Life Insurance Company, Manhattan Life Assurance Company of America.

Daniel Hargraves, FREEBORN & PETERS LLP, New York, New York, Counsel for AXA Equitable Life Insurance Company.

Randall S. MacTough, ZARWIN BAUM DEVITO KAPLAN SCHAER TODDY, PC, Wilmington, Delaware, Counsel for First Penn Pacific Life Insurance Company.

Joseph B. Cicero, Gregory Stuhlman, CHIPMAN BROWN CICERO & COLE, LLP, Wilmington, Delaware, Counsel for Berkshire Hathaway Life Insurance Company of Nebraska, Nationwide Life Insurance Company, Nationwide Life and Annuity Insurance Company, Allianz Life Insurance Company of North America, Ameritas Life Insurance Corp., Ameritas Life Insurance Corp. of New York, The Ohio National Life Insurance Company, Ohio National Life Assurance Corporation, Pacific Life Insurance Company, Pacific Life and Annuity Company, Columbus Life Insurance Company and Security Benefit Life Insurance Company.

R. Stephen McNeill, D. Ryan Slaugh, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware, Counsel for Americo Financial Life and Annuity Insurance Company, Great Southern Life Insurance Company, National Farmers Union Life Insurance Company, and United Fidelity Life Insurance Company.

William P. Bowden, Catherine A. Gaul, Ricardo Palacio, ASHBY & GEDDES, Wilmington, Delaware, Counsel for PHL Variable Insurance Company, Nassau Life Insurance Company f/k/a Phoenix Life Insurance Company and Nassau Life and Annuity Company f/k/a Phoenix Life and Annuity Company, Protective Life Insurance Company, The U.S. Branch of Sun Life Assurance Company of Canada, Fidelity & Guaranty Life Insurance Company, Fidelity & Guaranty Life Insurance of New York.

John C. Phillips, Jr., Paul S. Seward, PHILLIPS, GOLDMAN, MCLAUGHLIN & HALL, P.A., Wilmington, Delaware, Counsel for Hannover Life Reassurance Company of America and Security Life of Denver Insurance Company.

Joseph C. Schoell, FAEGRE DRINKER BIDDLE & REATH LLP, Wilmington, Delaware, Counsel for The Canada Life Assurance Company; Homesteaders Life Company; Police and Firemen's Insurance Association.

Kathleen M. Miller, SMITH, KATZENSTEIN & JENKINS, LLP, Wilmington, Delaware, Counsel for The Prudential Insurance Company of America, Metropolitan Life Insurance Company, Employers Reassurance Corporation and Jackson National Life Insurance Company.

David A. Felice, BAILEY & GLASSER, LLP, Wilmington, Delaware, Counsel for Great American Life Insurance Company.

John G. Harris, Peter C. McGivney, BERGER HARRIS LLP, Wilmington, Delaware, Counsel for the Reinsurance Association of America.

Garrett B. Moritz, Elizabeth M. Taylor, ROSS ARONSTAM & MORITZ LLP, Wilmington, Delaware; Matthew A. Clemente, R. Bradley Drake, John Grothaus, SIDLEY AUSTIN LLP, Chicago, Illinois, Counsel for Merced Private Claims, LLC.

Joelle E. Polesky, STRADLEY RONON STEVENS & YOUNG, Wilmington, Delaware, Counsel for American Council of Life Insurers.

Travis S. Hunter, Renee M. Mosley, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware, Counsel for Transamerica Life Insurance Company, Allstate Life Insurance Company, State Mutual Insurance Company, American Home Life Insurance Company.

Jarret P. Hitchings, DUANE MORRIS LLP, Wilmington, Delaware, Counsel for NW Hall Building LP.

Joseph Larkin, SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, Wilmington, Delaware, Counsel for John Hancock Life Insurance Company (U.S.A.).

Barry M. Klayman, Simon Fraser, COZEN O'CONNOR, Wilmington, Delaware, Counsel for Scottish Re (Dublin) dac.

Kevin J. Mangan, Nicholas T. Verna, WOMBLE BOND DICKERSON (US) LLP, Wilmington, Delaware, Counsel for Brighthouse Life Insurance Company and NonParty Brighthouse Life Insurance Company of NY, New York Life Insurance Company, New Your Life and Annuity Insurance Company, United Heritage Life Insurance Company, Shenandoah Life Insurance Company, USAA Life Insurance Company, United of Omaha Life Insurance Company, Companion Life Insurance Company, SBLI USA Life Insurance Company, Inc., S. USA Life Insurance Company, Inc., Genworth Life Insurance Company, Genworth Life and Annuity Insurance Company, Genworth Life Insurance Company of New York, USAA Life Insurance Company of New York, The Guardian Life Insurance Company of America.

Jody Barillare, MORGAN LEWIS & BOCKIUS LLP, Wilmington, Delaware, Counsel for Assured Guaranty (Europe) plc.

Peter H. Kyle, John L. Reed, DLA PIPER LLP (US), Wilmington, Delaware, Counsel for Non-Party SCOR Global Life Americas Reinsurance Company, SCOR Reinsurance Germany, Branch of SCOR SE, TOA Reinsurance Company, Limited of Tokyo, Japan, SCOR SE, SCOR Global Life Reinsurance Company of Delaware, SCOR Global Life USA Reinsurance Company, Columbian Life Insurance Company, Columbian Mutual Life Insurance Company.

OPINION REGARDING THE LIQUIDATION STANDARD

LASTER, Vice Chancellor.

Scottish Re (U.S.), Inc. ("SRUS" or the "Company") is a delinquent insurer. The Insurance Commissioner of the State of Delaware (the "Commissioner") successfully petitioned the court for an order placing the Company in receivership and appointing the Commissioner as receiver for the purpose of rehabilitating the Company.

The receivership has now entered its third year. The Commissioner has proposed a rehabilitation plan, but the Commissioner has not yet presented the plan for approval.

One impediment to the presentation of a rehabilitation plan has been a series of disputes about the types of information that the Commissioner must provide so that parties with claims against the Company can evaluate the plan and determine whether to file objections. Certain claimants sought the appointment of a special master to address the informational disputes.

The briefing over the appointment of a special master uncovered a deeper issue that divided the parties: They did not agree on the standard that the court would apply when determining whether to approve the rehabilitation plan. Not surprisingly, given that disagreement, they struggled to agree on what information was relevant.

The court directed the parties to confer and attempt to reach agreement on a standard for the court to apply when determining whether to approve the rehabilitation plan. To their credit, the parties reached agreement on a stipulation that specified several important dimensions of a governing test. But the parties could not agree on a critical issue: Whether the Commissioner will have to prove that he validly determined that the rehabilitation plan treats each claimant at least as well as the claimant would fare in a liquidation of the Company. This decision refers to this component as the "Liquidation Standard." It refers to the value that a claimant would receive in liquidation as the "Liquidation Value." Thus, Liquidation Value is the minimum amount that a claimant would receive under a rehabilitation plan that satisfies the Liquidation Standard.¹

Whether the Commissioner must satisfy the Liquidation Standard to obtain court approval for a rehabilitation plan presents an issue of first impression. Delaware's statutory scheme for evaluating a proposed rehabilitation does not address the role of the Liquidation Standard. No Delaware decision has spoken on the issue.

The proponents of the Liquidation Standard have identified a series of statutory frameworks that impose it, but all do so expressly. Delaware's statute is silent. In the absence of any express statutory language, it is not possible to construe the statutory scheme as requiring compliance with the Liquidation Standard.

The next question is whether the court should require compliance with the Liquidation Standard as a matter of common law. Approximately ten decisions from other jurisdictions have considered whether the Liquidation Standard applies as a matter of common law. A few secondary sources mention the issue.

All of the authorities derive from a pair of Depression-era decisions arising out of the rehabilitation of Pacific Mutual Life Insurance Company of California ("Pacific Mutual"), an insolvent California insurer. The rehabilitation of Pacific Mutual generated challenges under both California and federal law, with the proceedings culminating at the state level in a decision by the Supreme Court of California. See Carpenter v. Pac. Mut. Life Ins. Co. (Carpenter I ), 10 Cal.2d 307, 74 P.2d 761 (1937), aff'd sub nom. Neblett v. Carpenter (Carpenter II ), 305 U.S. 297, 59 S.Ct. 170, 83 L.Ed. 182 (1938). The Supreme Court of the United States granted certiorari to review the federal challenges, resulting in a decision that affirmed the Supreme Court of California's rulings on the federal issues. See Carpenter II , 305 U.S. at 305, 59 S.Ct. 170. The viability of the Liquidation Standard as a matter of common law turns on whether Carpenter I and Carpenter II (the "Pacific Mutual Decisions") impose the Liquidation Standard as a requirement for a rehabilitation plan to obtain court approval.

A close reading of the...