Levin v. NATL COLONIAL INS CO
| Decision Date | 12 February 2004 |
| Parties | In the Matter of NEIL D. LEVIN, as Superintendent of Insurance of the State of New York, Respondent, v. NATIONAL COLONIAL INSURANCE COMPANY, Respondent, and CHASE MANHATTAN BANK, N.A., Appellant. |
| Court | New York Court of Appeals Court of Appeals |
Eileen J. Berkman, New York City, Alyssa Kelman and E. Regan Adams for appellant.
Cozen O'Connor, New York City (Francine L. Semaya and William K. Broudy of counsel), for National Colonial Insurance Company, respondent. Jack A. Franceschetti, New York City, and Steven R. Harris for Superintendent of Insurance of the State of New York, respondent.
In this appeal we are asked whether Supreme Court properly exercised jurisdiction over a trust fund, established pursuant to New York Insurance Department Regulation 41, to resolve competing claims to the trust remainder brought by JPMorgan Chase Bank (sued herein as Chase Manhattan Bank, N.A.), the trustee, and National Colonial Insurance Company (NCIC), an insolvent insurer undergoing liquidation in Kansas. For the reasons that follow, we conclude that Supreme Court did not have jurisdiction in this regard, and that the remainder of the trust should be transferred to NCIC's liquidator in Kansas.
In 1989, NCIC, an insurer organized under the laws of the State of Kansas, sought to write excess and surplus line insurance policies in New York. As a condition of doing business as an unauthorized insurer, Regulation 41 (11 NYCRR part 27) required that NCIC establish a trust fund with Chase, a qualified financial institution. The trust fund, governed by a trust agreement, was exclusively available for payment of claims under policies issued to a resident of, or with respect to property situated in, a state in which NCIC was not licensed to conduct an insurance business. NCIC funded the trust by depositing $750,000 with Chase as trustee.
The trust agreement specified that, upon its termination and payment of outstanding liabilities, the remainder would be distributed to NCIC. In the event NCIC was found insolvent pursuant to the laws of Kansas, the trustee was to disburse the trust fund at the direction of the Superintendent of Insurance of the State of New York in accordance with the provisions of article 74 of the Insurance Law.
On September 21, 1990, the Kansas Insurance Department notified NCIC that the trust agreement did not comply with Kansas law and needed to be amended to insert certain mandatory language. Chase proposed alternative wording and advised that, "[i]n the event [this wording] is deemed unacceptable, [NCIC] will have to identify a new trustee and arrange for the transfer . . . of the trust assets." On March 8, 1991, NCIC advised Chase that the Kansas Insurance Department had rejected its proposed alternative wording; and on October 4, 1991, Chase notified NCIC that it could not accept the amendment to the trust agreement required by the Kansas Insurance Department. On June 11, 1992 and at NCIC's direction, Chase electronically transferred the trust's assets (NCIC's original deposit of $750,000 plus interest, for a total of $917,846) to NCIC's bank accounts. In so doing, Chase violated several of the trust agreement's express terms (as well as Regulation 41), including the five-year irrevocability period, the minimum funding provision and the requirement to notify the Superintendent upon the trust's termination.
By an order entered on July 16, 1993, the District Court of Shawnee County, Kansas, declared NCIC insolvent, placed NCIC in liquidation and appointed the Kansas Commissioner of Insurance as statutory liquidator of the estate. The liquidation order directed the Kansas liquidator to "take possession of [NCIC's] property, business and affairs," and vested him with "title to all [NCIC's] property, assets, [and] contracts." This order also enjoined and restrained all persons "from bringing, or further prosecuting" any actions or claims against NCIC or its "property or assets." The Kansas court retained jurisdiction "for the purpose of granting such other and further relief as the nature of this cause or the interest of the policyholders, reinsureds, creditors or stockholders of [NCIC], or the members of the public may require." At the time the liquidation order was entered, the trust was unfunded, Chase having transferred all the trust's assets to NCIC's bank accounts the previous year.
By letter dated October 7, 1993, the New York State Insurance Department demanded a "complete explanation" from Chase as to why the bank had released the full amount of the trust funds to NCIC. Further, the Department requested Chase to "[k]indly advise what action [Chase] intends to take to restore the missing funds which were untimely released or to indemnify any claimants that do or will have monies due them under the terms of the trust agreement." In January 1994, Chase responded by replenishing the trust fund with $750,000 of its own.
On April 19, 1994, the Superintendent petitioned Supreme Court for an order authorizing him to take possession of the trust as conservator under article 74 of the Insurance Law. Chase filed an affidavit in the proceeding claiming entitlement to any funds remaining in the trust after valid policyholder and beneficiary claims had been satisfied. NCIC in liquidation (NCICL) also filed an affidavit, arguing that the trust remainder, if any, was part of the estate's general assets.
Chase took the position that it was entitled to any remainder because the trust's funds were comprised solely of monies that it had contributed. NCICL characterized this fact as "irrelevant":
Notwithstanding its posture in the New York proceeding, on July 18, 1994 Chase filed a $750,000 proof of claim with the Kansas liquidator.
On December 20, 1994, Supreme Court issued an order granting the Superintendent possession of the trust as conservator pursuant to Insurance Law § 7406. The New York order "enjoined and restrained [all persons] from bringing or further prosecuting in the State of New York" (emphasis added) any action or claim against NCIC or the trust; and generally restrained all individuals from doing anything that might "waste" the trust or "allow or suffer the obtaining of preferences, judgments, attachments, garnishments or other liens, or the making of any levy against" the trust while in the Superintendent's possession and control as conservator. The order further directed the Superintendent to petition Supreme Court, on notice to Chase and the Kansas Insurance Commissioner, "for further direction should trust funds remain upon the satisfaction of all outstanding claims by NCIC's insureds and beneficiaries."
In February 2000, the Kansas court approved the Kansas liquidator's recommended allowances for claims to NCIC's estate. The Kansas order included Chase, with a claim of $750,000, as a Class IV general unsecured creditor of the estate. Chase did not file an objection to the Kansas order, or take any further action in Kansas to pursue its claim of ownership of the trust remainder.
On May 31, 2000, the Kansas liquidator prepared an unaudited Statement of NCIC's Net Assets in Liquidation. The report included as a "potential recoverable" $987,229 in a "State of New York Special Deposit." The Kansas liquidator noted that "a dispute surrounding release of this deposit to the NCIC estate may arise."
In December 2000, the Superintendent, as conservator of the trust, brought this special proceeding under article 74 of the Insurance Law. The Superintendent advised Supreme Court that Chase and the Kansas liquidator both claimed entitlement to the trust remainder, and sought an order directing its distribution. He relied on an affidavit dated November 21, 2000, in which the Kansas liquidator averred that "(i) there are no pending claims upon and (ii) there will be no claims upon the Trust Fund currently in the possession of and conserved by the Conservator."
Supreme Court determined that the funds deposited by Chase had not become a part of NCIC's estate. Applying principles of trust law and equity, Supreme Court entered an order directing that the trust remainder be distributed to Chase because otherwise NCIC would enjoy an "unjust windfall." The Appellate Division reversed on the law, ordering distribution of the trust to the Kansas liquidator, reasoning that "[t]he Kansas court had and has jurisdiction over the proper disposition of this trust asset and the liquidator in that proceeding should determine distribution of such asset" (296 AD2d 354, 354-355 [1st Dept 2002]). We granted Chase leave to appeal and now affirm.
In 1939, the National Conference of Commissioners on Uniform State Laws endeavored to resolve some of the complexities of liquidating an insolvent insurance company with assets in multiple states by approving the Uniform Insurers Liquidation Act (UILA). New York adopted the UILA in 1940 "with the main purpose in mind of providing a uniform system for the orderly and equitable administration of the assets and liabilities of defunct multistate insurers" (G. C. Murphy Co. v Reserve Ins. Co., 54 NY2d 69, 77 [1981]; see Insurance Law §§ 7408-7415). As NCIC is a "defunct multistate insurer[]," any analysis of New York's authority to administer its assets must begin with the UILA.1
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