In re Southern Sur. Co. of New York

• Decision Date: 28 December 1939
• Parties: In re SOUTHERN SURETY CO. OF NEW YORK.
• Court: New York Court of Appeals Court of Appeals

282 N.Y. 54

24 N.E.2d 845

In re SOUTHERN SURETY CO. OF NEW YORK.

Court of Appeals of New York.

Dec. 28, 1939.

Appeal from Supreme Court, Appellate Division, First Department.

Proceeding in the matter of the application of the People of the State of New York, by Louis H. Pink, as Superintendent of Insurance of the State of New York, for an order to take possession of the property and liquidate the business of the Southern Surety Company of New York, wherein the Goodyear Tire & Rubber Company, Incorporated, filed a claim. From an order of the Appellate Division, reversing order of the Special Term entered on report of the referee, and directing that claimant be allowed to participate in distribution of general assets free from a condition which was imposed by the liquidator, 256 App.Div. 237, 9 N.Y.S.2d 567, both parties appeal.

Order affirmed.

PIPPEY, J., and CRANE, C. J., dissenting. Alfred C. Bennett, Irvin Waldman, and Benjamin Potoker, all of New York City, for appellant and respondent.

L. W. Baker, David E. Hudson, and Arthur J. Marangelo, all of New York City, for respondent and appellant.

FINCH, Judge.

This is a proceeding for the liquidation of an insolvent insurance company incorporated under the laws of this State. The present appeal is brought by an Ohio policyholder of the insolvent company, which seeks to establish its right to participate in the distribution of (a) the general assets of the insolvent insurance company in the possession of the New York liquidator, and (b) the statutory fund required by section 13 of the Insurance Law (Consol. Laws, ch. 28; L. 1909, ch. 33) for the protection of policyholder creditors. Thus far, by the distribution of the special New York fund and of general assets, the New York liquidator has paid dividends of 3.2% and 7.3% respectively out of the two classes of assets. As a condition for doing business in the State of Ohio, the insolvent insurance company had been required to create a special fund for the benefit of the policyholders. Ohio General Code, s 9510, subd. 2. Claimant, together with other Ohio policyholder creditors, has received a dividend of 12.675% on its claim as a result of the distribution of the Ohio fund. Only Ohio policyholders received payments out of the fund. The New York liquidator has allowed the claim of claimant for the difference between its original debt and the amount realized from the Ohio deposit upon the condition that no dividend will be paid to claimant until all allowed policyholder claimants shall have received dividends totaling 12.675% of their respective claims, or an amount equal to the dividend received by claimant in Ohio out of the deposit formerly there held by the Ohio State Superintendent of Insurance. Special Term sustained the report of the referee dismissing the objections of claimant to the condition which the liquidator attached to the allowance of the claims. The Appellate Division reversed the order of Special Term and directed that claimant be allowed to participate in the distribution of the general assets free from the condition imposed by the liquidator. In its opinion the Appellate Division stated further that it did not consider the right of claimant to participate in the special New York fund because the court understood that no claim was being made thereto. There are cross-appeals.

The liquidator appeals in order to have the determination of the Appellate Division reversed, and claimant appeals in order to have the determination of the Appellate Division modified so as to provide that claimant is entitled to share in the special New York fund.

Appeal of the Liquidator. The question to be determined on this phase of the appeal is whether the claimant, an Ohio policyholder creditor, may participate in the distribution of the general assets in New York on the same basis as any other secured creditor, i. e., by proving for the difference between the amount of the original debt and the amount realized on the collateral. The disposition of this question in turn depends upon whether the provisions of the Ohio law requiring the deposit established a trust fund for the benefit of Ohio creditors only.

The Ohio statute provides that ‘* * * a company of another state, territory, district or country admitted to transact the business of indemnifying employers and others, in addition to any other deposit required by other laws of this state, shall deposit with the superintendent of insurance for the benefit and security of all its policy holders, fifty thousand dollars in bonds of the United States or of the state of Ohio, or of a county, township, city or other municipality in this state, which shall not be received by the superintendent at a rate above their par value.’

(1) In construing the above provision, together with other sections of the Ohio Code (641, 642 and 643), the courts of Ohio have held consistently over a period of years that such a deposit is security for the claims of Ohio policyholders only, and that the Superintendent of Insurance of Ohio is the trustee of an express trust in which these policyholders are beneficiaries as secured creditors, and such appears to be the interpretation given to the statute by the Supreme Court of Ohio. State ex rel. Van Schaick v. Bowen, 131 Ohio St. 310, 2 N.E.2d 824. In addition, the Superintendent of Insurance of New York concedes that, unlike the provisions designed to cover the same subject-matter in New York, which have been held to be for the benefit of all American creditors and not only those residing in New York (L. 1909, ch. 33; Insurance Law, s 13; cf. s 27; Matter of People by Stoddard (Norske Lloyd Ins. Co.), 242 N.Y. 148, 151 N.E. 159, 45 A.L.R. 622), the Ohio fund is for the benefit of Ohio policyholder creditors only. Moreover this particular Ohio fund in question apparently has been distributed under judicial sanction upon that basis. The Ohio viewpoint, that such a fund is a trust fund for the protection of Ohio policyholders only, and that the beneficiaries are secured creditors, has been the general view of deposits made under similarly worded statutes. Blake v. McClung, 172 U.S. 239, 257, 19 S.Ct. 165, 43 L.Ed. 432;People v. Granite State Provident Ass'n, 161 N.Y. 492, 496, 497,55 N.E. 1053;Matter of People by Stoddard (Norske Lloyd Ins. Co.), 249 N.Y. 139, 149,164 N.E. 111;Bank Commissioners v. Granite State Provident Ass'n, 70 N. H. 557, 49 A. 124,85 Am.St.Rep. 646. Under the law of Ohio this claimant was, therefore, a secured creditor, notwithstanding that the security was not in its possession but was held in trust for its benefit by the Ohio Superintendent of Insurance. It was a secured creditor as would be a bondholder where a trustee held collateral for his benefit and for the benefit of other bondholders. State ex rel. Haavind v. Crabbe, 114 Ohio St. 504, 151 N.E. 755; State ex rel. Van Schaick v. Bowen, supra; Western Assurance Co. of Toronto, Canada v. Halliday, C. C., 110 F. 259; affirmed 6 Cir., 126 F. 257. The same principle has been applied in this State. People v. Granite State Provident Ass'n, 161 N.Y. 492, 55 N.E. 1053.

We are not now confronted with the problem of what the situation would have been if the State of Ohio had attempted merely to give a preference to Ohio creditors in the assets of the insolvent company situated in Ohio, when there were no facts present as there are in the case at bar, making them secured creditors. Cf. Blake v. McClung, supra.

Coming into this State, therefore, as a secured creditor, there appears no reason why claimant should not be included within the statutory provision regarding secured creditors, which reads as follows: ‘No claim of any secured claimant shall be allowed at a sum greater than the difference between the value of the security and the amount for which the claim is allowed, unless the claimant shall surrender his security to the superintendent in which event the claim shall be allowed in the full amount for which it is valued.’ Insurance Law, art. XI, s 425, subd. 5.

(2) The above section merely restates the well-recognized ‘Bankruptcy Rule,’ by which secured creditors are allowed to prove the balance of their claims above the value of their security, as contrasted with the ‘Chancery Rule,’ by which secured creditors are allowed to prove their claims in full without regard to their security. Merrill v. National Bank of Jacksonville, 173 U.S. 131, 19 S.Ct. 360, 43 L.Ed. 640. There has thus been declared by statute that in a liquidation proceeding of an insolvent insurer in this State, the ‘Bankruptcy Rule’ shall be followed. This court has also held that the equitable rule of equality among creditors of the same class does not operate to deprive a creditor who holds security, of his superior rights. Matter of People by Van Schaick (Southern Surety Co.), 266 N.Y. 589, 195 N.E. 213;Matter of People by Beha (First Russian Ins. Co.), 253 N.Y. 365, 171 N.E. 572. In common with other secured creditors, therefore, the beneficiaries of such a trust may prove their claims for the difference between the original debt and the amount realized on the collateral. Bank Commissioners v. Granite State Provident Ass'n, supra, 70 N.H. at pages 560-562, 49 A. at page 124,85 Am.St.Rep. 646; 2 Beale on Conflict of Laws, ss 264.2, 264.3, 264.4.

Upon the appeal of the liquidator, therefore, the order of the Appellate Division should be affirmed.

(3) The Appeal of Claimant. The Insurance Law, section 13, provides that insurance companies shall deposit securities with the Superintendent of Insurance, which ‘shall be held * * * for the protection of the policyholders of such domestic insurance corporation or insurer within the United States.’ It is clear from the language, and the Superintendent of Insurance apparently concedes, that this fund is not limited to New York policyholders, but to policyholders anywhere within the United States. The section has been so construed. Matter...