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

• Decision Date: 31 March 2022
• Docket Number: C.A. No. 2019-0175-JTL
• Citation: 273 A.3d 277
• Parties: In the MATTER OF the Rehabilitation of SCOTTISH RE (U.S.), INC.
• Court: Court of Chancery of Delaware

273 A.3d 277

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 28, 2022

Date Decided: March 31, 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, Attorney 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.

LASTER, V.C.

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 that placed the Company in receivership and appointed the Commissioner as receiver for the purpose of rehabilitating the Company. The delinquency proceeding has now entered its third year. The Commissioner has proposed a rehabilitation plan, but has not yet sought to have the plan approved.

The Company acted solely as a reinsurer. In that capacity, the Company entered into reinsurance agreements with primary insurers in which the Company agreed to pay a portion of the losses that their insureds suffered. In the language of the insurance trade, the primary insurers are called cedents, because they cede a portion of the premium associated with their reinsured policies in exchange for the reinsurer's commitment to pay the ceding insurer for a portion of its losses. The cedent remains obligated to pay its insureds for their losses regardless of whether the reinsurer fulfills its obligations.

Upon entering receivership, the Company stopped making payments to its contractual counterparties so that it could marshal its assets for purposes of rehabilitation. The Company thus stopped paying its cedents for losses they incurred. The cedents’ claims against the Company for those losses constitute general, unsecured claims.

Notably, the receivership did not affect the cedents’ obligations to make premium payments to the Company. And it had no effect on the cedents’ obligations to their own insureds. The cedents thus found themselves in the uncomfortable position of continuing to pay premiums to the Company for reinsurance, continuing to pay their insureds for their losses, and yet not receiving any payments from the Company.

By statute, Delaware law recognizes the right of a delinquent insurer and a contractual counterparty to offset mutual debts or mutual credits, subject to certain exceptions. The court previously approved a plan under which parties who owed qualifying obligations to the Company could offset those obligations against any qualifying amounts that the Company owed (the "Offset Plan").

Through the Offset Plan, cedents who could claim offsets received significant value from the Company by using the amounts they owed the Company to net out their losses. Effectively, those cedents paid their own losses using the amounts they otherwise would have paid to the Company.

The ability of cedents to invoke the Offset Plan fell along a spectrum. Some cedents had large offsets that could satisfy all or a high percentage of their losses. Other cedents had much smaller offsets. Some had none at all. Those cedents had to bear their losses without receiving any value in return.

The Commissioner currently asks the court to permit the Company to make payments to a subset of the cedents for a portion of their losses, with those payments to be made before the approval of a rehabilitation plan ("Pre-Plan Payments").¹ The Commissioner contemplates that through the Pre-Plan Payments, the Company will pay amounts sufficient for each cedent to have received compensation for at least 43% of the cedent's undisputed losses on ceded policies. Cedents who already received value through offsets in excess of the 43% threshold will not receive any Pre-Plan Payments. General creditors who are not cedents will not receive any Pre-Plan Payments. The Pre-Plan Payments only will cover undisputed losses. No payment will be made on disputed claims.

The standard of review for the Motion is unsettled. The parties agree that some form of review for abuse of discretion applies. The open question is how to operationalize that standard. Delaware law has an established approach for applying the abuse of discretion standard when an aggrieved party challenges an administrative decision by the Commissioner. But Delaware law has not addressed how to apply the abuse of discretion standard in a context similar to this one, where the Commissioner seeks approval to take action as part of an ongoing effort to rehabilitate an insurer. Following the lead of...