In re Windhaven Top Ins. Holdings, LLC
| Decision Date | 15 October 2021 |
| Docket Number | Case No. 20-10524 (Jointly Administered) |
| Citation | 636 B.R. 596 |
| Parties | IN RE: WINDHAVEN TOP INSURANCE HOLDINGS, LLC, et. al., Debtors. |
| Court | U.S. Bankruptcy Court — District of Delaware |
GEBHARDT & SMITH LLP, Lisa Bittle Tancredi, 1000 N. West Street, Suite 1200, Wilmington, DE 19801, Counsel for Risk & Regulatory, Consulting, LLC.
MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Eric D. Schwartz, Matthew B. Harvey, Paige N. Topper, 1201 N. Market St., 16th Floor, Wilmington, DE 19899-1347 - and - HOGAN LOVELLS US LLP, Peter Ivanick, Alex M. Sher, 390 Madison Avenue, New York, NY 10017, Counsel to Atalaya Capital Management LLP, Atalaya Special Opportunities Fund VII LP, and Midtown Madison Management LLC.
COZEN O'CONNOR, Mark E. Felger, Barry M. Klayman, Gregory F. Fischer, 1201 North Market Street, Wilmington, DE 19801, Special Counsel to Jeoffrey L., Burtch, Chapter 7 Trustee.
Before the Court is the Motion of Risk & Regulatory Consulting, LLC ("RRC"), as the Special Deputy Receiver of Windhaven National Insurance Company for Relief from the Automatic Stay to Litigate Certain Disputes in the District Court of Travis County, Texas, filed on September 11, 20202 (the "Motion"). The Court held a hearing3 on the Motion on October 14, 2020 and took this matter under advisement. In the Motion, RRC seeks relief from the automatic stay claiming that the Bankruptcy Code is reverse preempted by the Texas Insurance Code, and even if it is not "cause" exists to lift the stay; further asserting, in the alternative, that this Court should abstain from hearing the dispute. As set forth below, the Bankruptcy Code is not reverse preempted by the Texas Insurance Code, this dispute involves, at its base, a contract dispute which will determine the owner of the Disputed Funds, as defined below. Furthermore, RRC has not established cause for lifting the stay. Lastly, the Court will not abstain from hearing the contract dispute.
This Court has jurisdiction over this motion for relief from the automatic stay pursuant to 28 U.S.C. §§ 157 and 1334 and the Amended Standing Order of Reference from the United States District Court for the District of Delaware dated as of February 29, 2012. This is a core proceeding under 28 U.S.C § 157(b). Venue for this Motion is proper pursuant to 28 U.S.C. §§ 1408 and 1409. Pursuant to Local Rule 9013-1(f), the Movant consents to entry of a final order by this Court in determination of this Motion.4
On March 5, 2020, (the "First Petition Date"), Debtors Windhaven Underwriters, LLC ("WU"), Windhaven Select, LLC ("WS"), Windhaven Top Insurance Holdings LLC, and Windhaven Insurance Services, LLC ("WIS") filed voluntary petitions for relief under Chapter 7 of the Bankruptcy Code with the Bankruptcy Court.
On March 18, 2020 (the "Second Petition Date"), Debtors Clutch Analytics LLC ("Clutch Analytics"), Whited and Sons LLC, Clutch Wholesale Insurance Agency LLC, Windhaven Claims Management, LLC ("WCM"), Windhaven National Holding Company, and The Hearth Insurance Group, LLC (the "Hearth") filed voluntary petitions for relief under Chapter 7 of the Bankruptcy Code with the Bankruptcy Court.
On April 3, 2020 (the "Third Petition Date," and together with the First Petition Date and Second Petition Date, the "Petition Dates," and each a "Petition Date"), Debtor Windhaven Insurance Holdings Corporation ("WIHC") filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code with the Bankruptcy Court.
The Trustee was appointed by the Office of the United States Trustee to serve as the duly authorized Trustee for the Debtors’ Estates, and he continues to serve in this capacity.
Windhaven Services, LLC, entered into a Managing General Agent Agreement5 with Windhaven National Insurance Company ("WNIC"),6 effective as of April 1, 2015 (the "WNIC MGA Agreement"), and WIS entered into a similar agreement with WNIC, effective as of July 1, 2018 (collectively with the WNIC MGA Agreement, the "MGA Agreements").
Under the MGA Agreements, WNIC appointed Windhaven Services and WIS as Managing General Agents ("MGAs") to perform certain policy administration, underwriting and processing services on behalf of WNIC. Pursuant to the MGA Agreements, "[t]he Managing General Agent has the authority and duty to act on behalf of the Company in all respects, insofar as necessary for the Managing General Agent to perform the function of a managing general agent for the Company."7 That included the authority to accept applications, binders, and Policies for classes or lines of insurance underwritten by WNIC.8
The MGAs’ sole compensation for services performed for WNIC under the MGA Agreements was commissions based upon Net Collected Premiums.9 "Net Collected Premium" is defined as "the total of all currently collected premiums (including down payments) on policies written by the [MGA] between the Company and the [MGA] less return premium and cancellations."10 The MGA Agreements provided that the MGAs were entitled to retain the policy fee less premium taxes.11 The MGAs were required to establish and maintain separate Premium Escrow Accounts, and all premiums collected by the MGAs on business produced under the MGA Agreements were to be deposited into those accounts.12 The MGAs were required to remit the balance of the accounts (premium minus commissions, losses and loss adjustment expenses) to WNIC on a periodic basis.13
The MGA Agreements provided that the MGAs would accept and hold all premiums collected and other funds relating to the business written under the MGA Agreements in a fiduciary capacity. "The privilege of retaining commissions shall not be construed as changing the fiduciary capacity."14
Interest income from the Premium Escrow Accounts and the cost of maintaining the Escrow Accounts belonged to the MGAs.15 The MGA Agreements provided that "[a]ll funds and invested assets of the Company are the exclusive property of the Company, held for the benefit of the Company, and are subject to the control of the Company."16
The MGA Agreements provided that in the event WNIC were placed in receivership or seized by the Texas Commissioner of Insurance under Texas Insurance Code Chapter 443, all the rights of WNIC under the MGA Agreements would extend to the Receiver or Commissioner.17
A number of disputes between the Movant and the Trustee have arisen concerning the following funds (collectively, the "Disputed Funds"): (1) approximately $3,000,000 currently held in Premium Escrow Accounts nominally titled in the names of the MGAs, which they hold as trustees and fiduciaries, for the benefit of WNIC, (2) approximately $57,200 held in a refund account which Windhaven Services holds as a fiduciary for the benefit of certain of WNIC's policy holders, (3) an additional $338,923.27 belonging to WNIC that appears to have been inadvertently deposited into a premium escrow account of another insurance company (Old American Insurance Company), which funds are similarly held by the debtors as trustees and fiduciaries for the benefit of WNIC, and (4) more than $3,000,000 of payments by consumers for insurance policies issued by WNIC, held by a credit card processor in the name of one of the debtors, in a fiduciary capacity per the MGA Agreements.
RRC asserts that the Disputed Funds are not property of the bankruptcy estates because they are held by the Debtors in a fiduciary capacity for the benefit of WNIC. The Trustee, however, asserts a right of setoff and refuses to turn the Disputed Funds over to the RRC. The disputes between RRC and the Trustee concerning the Funds shall be referred to herein as the "Funds Dispute."
RRC asserts that applicable Texas statute reverse-preempts (or may reverse preempt) certain provisions of the Bankruptcy Code. The McCarron-Ferguson Act18 provides that no federal law preempts any state law promulgated "for the purpose of regulating the business of insurance."19
The statute did not purport to make the States supreme in regulating all the activities of insurance companies; its language refers not to the persons or companies who are subject to state regulation, but to "laws regulating the business of insurance." Insurance companies may do many things which are subject to paramount federal regulation; only when they are engaged in the "business of insurance" does the statute apply.20
As such, if a specific state law regulating the business of insurance conflicts with a generally applicable federal law, state law controls.
The Supreme Court held:
the prerequisites for reverse-preemption as identified in the statute: (1) the federal statute does not specifically relate to insurance, (2) the state statute was enacted to regulate the business of insurance, and (3) the federal statute would invalidate, impair, or supercede the statute.21
It is clear that the Bankruptcy Code does not specifically relate to the business of insurance,22 thus, the Court need only answer (i) whether the state statute in question, the Insurer Receivership Act, Chapter 443 of the Texas Insurance Code, and its specific provisions are implicated here were enacted to regulate the business of insurance, and (ii) whether application of the Bankruptcy Code would "invalidate, impair, or supercede" the Texas insurance statutes.
The parties and the Court agree that the first remaining question is also met. It is clear that the Insurer Receivership Act, Chapter 442 of the Texas Insurance Code, governs insolvent insurers and was enacted for the purpose of regulating the business of insurance.
Thus, the Court is left with whether the bankruptcy court's jurisdiction over the MGA Agreements invalidates, impairs, or supersedes state law. Here, the issues raised by the Motion is, whether under the MGA Agreements, who is entitled to funds in the Premium Escrow Accounts held by the Debtors and the fund...
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