Liquidation of Integrity Ins. Co., Matter of

• Decision Date: 12 December 1996
• Parties: In the Matter of the LIQUIDATION OF INTEGRITY INSURANCE COMPANY.
• Court: New Jersey Supreme Court

Page 128

147 N.J. 128

685 A.2d 1286

In the Matter of the LIQUIDATION OF INTEGRITY INSURANCE COMPANY.

Supreme Court of New Jersey.

Argued Jan. 29, 1996.

Reargued Sept. 24, 1996.

Decided Dec. 12, 1996.

Thomas S. Novak, Newark, for appellant, Commissioner of Insurance of the State of New Jersey, in his capacity as Liquidator of Integrity Insurance Company (Sills Cummis Zuckerman Radin Tischman Epstein & Gross, Special Council, and Peter G. Verniero, Attorney General of New Jersey, attorneys; Mr. Novak, Newark, and Joseph L. Yannotti, Assistant Attorney General of counsel; Adam J. Kaiser and Thomas M. Hunt, Deputy Attorneys General, on the brief).

Barry G. Saretsky, New York City, a member of the New York bar, argued the cause for respondent Credit Lyonnais (Shanley & Fisher, attorneys; Susan M. Sharko, Morristown, on the briefs).

James M. Mulvaney, Morristown, submitted a brief on behalf of amicus curiae, Surety Reinsurers (McElroy, Deutsch & Mulvaney, attorneys; Mr. Mulvaney and Margaret F. Catalano, Morristown, on the brief).

The opinion of the Court was delivered by

GARIBALDI, J.

Integrity Insurance Company (Integrity or surety), a New Jersey insurance company, became insolvent and filed for liquidation. The Commissioner of Insurance (Commissioner) was appointed the Liquidator. Integrity had previously issued surety bonds to Credit Lyonnais, guaranteeing the payment of the promissory notes of investors in certain partnerships. The promissory notes, which called for installment payments, were assigned to Credit Lyonnais as collateral for substantial loans that it made to the partnerships. Before Integrity was liquidated, the debtors had begun to default on their installment payments.

The relevant statute governing the liquidation of an insolvent insurer permits creditors to file claims that are due against the insurance company. Credit Lyonnais filed claims for the full amounts of the promissory notes even though not all of the unpaid installments on the notes were actually due and owing on the date the surety bonds terminated. That Credit Lyonnais may not file a claim with the Liquidator for post-termination losses is undisputed. Credit Lyonnais, however, claims that it faced an uninsurable risk at the time of Integrity's default and could not purchase alternative insurance with its returned premium. Therefore, it faced a loss in the full amount of the bond. The issue, then, is whether under basic principles of contract law Credit Lyonnais is entitled to file a claim for the full amount of the surety bond because Integrity's liquidation, a breach of contract, led to damages equal to the whole value of the bond.

I

In 1984 and 1985, seven different groups of investors each created their own limited partnership in California. Some investors were limited partners in more than one partnership. Those partnerships were created as tax shelters for the investors.

The investors signed promissory notes obligating them to make installment payments to the limited partnerships running through November 1989. According to the terms of the promissory notes, if an investor defaulted on an installment payment, the limited partnership maintained the right to demand immediate payment of the entire note.

All seven partnerships obtained loans from Credit Lyonnais, a multinational bank. The partnerships assigned the promissory notes to Credit Lyonnais as collateral for the loans. As part of those assignments, Credit Lyonnais became entitled to receive the installment payments directly from the investors. Credit Lyonnais sought surety bonds from Integrity to cover the risk of default on the part of the investors and partnerships.

Integrity issued surety bonds to Credit Lyonnais that obligated Integrity to pay to Credit Lyonnais the entire amount of the note if the principal debtor defaulted. In sum, Integrity guaranteed repayment of Credit Lyonnais's loans to the partnerships. Integrity also issued surety bonds to other banks for similar arrangements with limited partnerships. To limit its risk, Integrity reinsured those bonds. At the time of insolvency, Integrity had reinsurance policies in the amount of $63.5 million.

In 1986, the investors began to default. Credit Lyonnais sent timely notice to Integrity, demanding payment of the missed installments; Integrity covered the missed payments pursuant to the surety bonds. The obligation to pay the entire unpaid balance on the notes was not accelerated. Integrity sought to collect the unpaid amounts from the defaulting investors. In some cases, Integrity sued and obtained judgment for the entire amount of the bond, not simply the amount of the missed payment. Although Integrity obtained judgments for the entire amount, it apparently never actually collected more than the amount of missed installments.

In 1987, Integrity filed an action for insolvency and liquidation in the Superior Court, Chancery Division, under the statutory scheme governing regulated insurance companies, N.J.S.A. 17:30C-1 to -31. On March 24, 1987, the Chancery Division issued an Order of Liquidation declaring Integrity to be insolvent. The Commissioner was appointed to serve as Liquidator and was authorized to wind up the company's affairs. Although the reinsurance policies were to remain in effect, the court ordered Integrity's surety bonds to terminate on April 24, 1987. The reinsurers were required to pay the full amount of any claim to the Liquidator, even if the underlying claimants received only a percentage of their claims from Integrity's remaining assets. In addition, the order set a deadline for filing proofs of claim against Integrity.

On July 8, 1987, the court established the procedure for the determination of proofs of claim. The Liquidator was required to recommend whether the court should accept the proofs of claim by issuing Notices of Determination. Claimants that disagreed with the Liquidator's determination could demand a hearing.

Credit Lyonnais submitted seven proofs of claim under the surety bonds. Hundreds of proofs of claim were submitted against other surety bonds that had been issued by Integrity. The Liquidator recommended that the trial court deny all the proofs of claim to the extent they made claims for installments that were due after April 24, 1987, the date the surety bonds terminated. He relied on N.J.S.A. 17:30C-28a(1), which provides that proofs of claim can encompass all claims that "[became] absolute against the insurer on or before the last day fixed for filing proofs of claim...."

The Liquidator then filed a motion for summary judgment, which Credit Lyonnais and other banks opposed. The trial court appointed a Special Master to hear the claims. The Special Master concluded that the surety bonds terminated under the Liquidation Order and recommended denying the claims for defaults on installments due after termination, because they neither occurred nor existed at the time the bonds terminated. The Special Master further recommended refunding unearned surety premiums attributable to post-termination coverage.

The trial court adopted the Special Master's recommendation, in November 1992, and granted summary judgment to the Liquidator, denying claims for post-termination defaults but ordering the return of unearned premiums. The trial court remanded to the Special Master, however, to create a formula for calculating unearned premiums. The Special Master's calculations were approved in an additional order in April 1994. Credit Lyonnais then appealed the portions of the trial court's order, granting the Liquidator's motion for summary judgment and confirming the disallowance of the proofs of claim to the extent they sought a distribution for post-termination defaults. The Liquidator cross-appealed on the limited basis that if the entire claim was upheld, the order returning the premiums should be reversed.

The Appellate Division reversed. 281 N.J.Super. 364, 657 A.2d 902 (1995). It held that Credit Lyonnais's claim was valid, because under the text of the bond Integrity's obligation to pay the outstanding bond amount arose when it issued the bond. In addition, the panel held that the Liquidator was judicially estopped from challenging this interpretation. The Appellate Division upheld Credit Lyonnais's claim for the full amount of the unpaid balance and vacated the award of unearned premiums. We granted Integrity's petition for certification. 142 N.J. 510, 665 A.2d 1104 (1995).

II

The Legislature has enacted a statutory design to govern insolvent insurance companies, N.J.S.A. 17:30C-1 to -31. Under N.J.S.A. 17:30C-8, the Commissioner can apply to the Superior Court for an order directing the liquidation of an insolvent insurance company. The court will grant an order of liquidation if the insurer is indeed insolvent, and the Commissioner will be appointed the liquidator.

The order of liquidation effectively ends the insurer's business, and the court is required to set a specific date for the termination of all policies. "When a company of this character becomes insolvent, and passes into the hands of a receiver, it ceases to be for all purposes, except that declared by the statute, the winding up of its affairs...." Doane v. Milville Mut. Marine & Fire Ins. Co., 43 N.J.Eq. 522, 535, 11 A. 739 (Ch. 1887), rev'd on other grounds, 45 N.J.Eq. 274, 17 A. 625 (E. & A. 1889). After liquidation and termination, any losses suffered by policyholders "should be disallowed. The date of the decree of insolvency is the time at which the [insurer's] liability for future losses terminated." Withers v. Great Am. Nat'l Life Guardian, 124 N.J.Eq. 4, 9, 200 A. 485 (Ch.1938); accord Mayer v. Attorney General, 32 N.J.Eq. 815 (E. & A. 1880).

N.J.S.A. 17:30C-9 requires the Commissioner to marshall all assets of the estate, and N.J.S.A. 17:30C-20 provides a mechanism for those with claims against the insurer to submit them and collect from the marshalled assets. The...