Liquidation of Union Indem. Ins. Co. of New York, Matter of

• Decision Date: 03 May 1994
• Docket Number: P,BANK-OAKLAN
• Citation: 200 A.D.2d 99,611 N.Y.S.2d 506
• Parties: In the Matter of the LIQUIDATION OF UNION INDEMNITY INSURANCE COMPANY OF NEW YORK. MICHIGAN NATIONALlaintiff-Appellant, v. AMERICAN CENTENNIAL INSURANCE COMPANY, et al., Defendants-Respondents, and American Druggists' Insurance Company, et al., Defendants. Salvatore P. CURIALE, the Superintendent of Insurance, as Liquidator of Union Indemnity Insurance Company of New York, Third-Party Plaintiff-Intervenor-Respondent/Third-Party Plaintiff-Intervenor-Appellant, v. AMERICAN CENTENNIAL INSURANCE COMPANY, et al., Third-Party Defendants-Respondents, and American Druggists' Insurance Company, et al., Third-Party Defendants.
• Court: New York Supreme Court — Appellate Division

Page 506

611 N.Y.S.2d 506

200 A.D.2d 99

In the Matter of the LIQUIDATION OF UNION INDEMNITY

INSURANCE COMPANY OF NEW YORK.

MICHIGAN NATIONAL BANK-OAKLAND, Plaintiff-Appellant, v. AMERICAN CENTENNIAL INSURANCE COMPANY, et al., Defendants-Respondents, and American Druggists' Insurance Company, et al., Defendants.

Salvatore P. CURIALE, the Superintendent of Insurance, as Liquidator of Union Indemnity Insurance Company of New York, Third-Party Plaintiff-Intervenor-Respondent/Third-Party Plaintiff-Intervenor-Appellant, v. AMERICAN CENTENNIAL INSURANCE COMPANY, et al., Third-Party

Defendants-Respondents,

and

American Druggists' Insurance Company, et al., Third-Party Defendants.

Supreme Court, Appellate Division First Department.

May 3, 1994.

Leo T. Crowley, of counsel (Robert S. De Leon, with him on the brief, Winthrop, Stimson, Putnam & Roberts, attorneys), for plaintiff-appellant.

Lawrence I. Brandes, of counsel (Nancy K. Eisner and William M. Popalisky, with him on the brief, Rosenman & Colin, attorneys), for American Centennial, Atlas Assurance, 1792 Co., Republic, First Horizon, Puritan, Allianz, Simcoe & Erie, and GTE, defendants-respondents/third-party defendants-respondents.

LeBoeuf, Lamb, Leiby & MacRae, for defendant-respondent/third-party defendant-respondent, Kansa.

Steven E. Lewis, of counsel (David Klein, with him on the brief, Dunnington, Bartholow & Miller, attorneys), for defendant-respondent/third-party defendant-respondent, Aneco.

Peter J. Biging, of counsel (Michael D. Brown, with him on the brief, Ohrenstein & Brown, attorneys), for defendants-respondents/third-party defendants-respondents, Philan and Benodet.

Larry P. Schiffer, of counsel (Tracy A. Stein and Evan L. Smoak, with him on the brief, Werner & Kennedy, attorneys), for defendant-respondent/third-party defendant-respondent, Hanover.

R. Mark Keenan and Anna S. Chacko, of counsel (Randall E. Cooper, with them on the brief, Stephen Doody and Anderson Kill Olick & Oshinsky, P.C., attorneys), for third-party plaintiff-intervenor-respondent/third-party plaintiff-intervenor-appellant.

W. Henry Jernigan, Jr., of counsel (Jacqueline Syers Duncan, with him on the brief, Jackson & Kelly, attorneys), on behalf of Com'r of Ins. for Com. of Ky. as amicus curiae.

Before ELLERIN, J.P., and KUPFERMAN, RUBIN and NARDELLI, JJ.

KUPFERMAN, Justice.

Union Indemnity Insurance Company of New York ("Union Indemnity"), a subsidiary of Frank B. Hall & Co., Inc. ("Hall"), was placed into liquidation by order of the Supreme Court, New York County (Ira Gammerman, J.), entered July 16, 1985, based in part upon the finding that it was insolvent, its debts exceeding its assets on March 25, 1985 by $138,501,581.

On September 20, 1985, plaintiff Michigan National Bank-Oakland ("Michigan"), the beneficiary of a $2 million surety bond issued to Ginso Investment Corp. by Union Indemnity, brought this action on the bond directly against the reinsurers (defendants-respondents American Centennial Ins. Co., et al.) of Union Indemnity's obligation, upon Union Indemnity's failure to make payment. Thereafter, the Superintendent of Insurance, as Liquidator, intervened in the action, alleging that the reinsurance proceeds are assets of the estate of the insolvent (Union Indemnity) which, in order to be equally distributed to all policyholders, should be paid to the Liquidator and not to Michigan. The reinsurers then counterclaimed that their reinsurance treaties had been procured by fraud in that (1) Hall operated Union Indemnity for improper purposes and (2) Union Indemnity failed to disclose its insolvency in its annual reports.

In a separate action, Corcoran v. Hall & Co., et al. (N.Y. County Index No. 5273/87) ("the Hall action"), the Liquidator brought an action against Union Indemnity's parent company, its affiliates, Hall and Union Indemnity's officers and directors, and Hall's outside auditors (collectively, "the Hall defendants") for, inter alia, mismanagement, failure to disclose Union Indemnity's insolvency, breach of fiduciary duties, violations of the Insurance Law, and malpractice. Certain creditors of the insolvent insurer's estate (including the reinsurer American Centennial) then filed similar complaints against the various Hall defendants.

The Hall defendants then moved to dismiss the Hall action for failure by the Liquidator to plead fraud with specificity and for lack of standing, claiming that the Liquidator's complaint alleged injury to Union Indemnity's creditors only, and not to Union Indemnity itself. The competing creditor actions were consolidated with the Hall action. The Liquidator then cross-moved to shift the burden of proof to the Hall defendants based upon, inter alia, the disarray of Union Indemnity's books and records.

In opposition to the Hall defendants' dismissal motions, the Liquidator submitted the affidavits of two of its outside counsel along with supporting documentation, including ones drafted by Union Indemnity officers and directors, to the effect that the Liquidator's complaint clearly alleged Hall's active participation in a scheme to defraud, which allegations were based in part on matters uncovered by the Liquidator's ongoing investigation into Union Indemnity's affairs, which was being severely hampered by the disorganized condition of Union Indemnity's books.

The liquidation court (Gammerman, J.) denied the motions to dismiss in the Hall action, and denied the Liquidator's cross-motion to shift the burden of proof on various issues until completion of discovery. Upon appeal, this Court affirmed (149 A.D.2d 165, 545 N.Y.S.2d 278). Thereafter, in June 1989, the Liquidator and all of the Hall defendants settled, subject to a still-pending court approval.

After Justice Gammerman's decision, but prior to the affirmance or the settlement of the Hall action, the reinsurers in the instant action moved for summary judgment, seeking to rescind their reinsurance obligations on the ground of fraudulent inducement by reason of Union Indemnity's failure to disclose its insolvency. In support of their motion, they submitted the affidavits of the Liquidator's outside counsel in the Hall action, but no other evidence, arguing that the affidavits constituted judicial admissions as to the fraudulent scheme.

In opposition, the Liquidator submitted affidavits which had been submitted in the Hall action in which Union Indemnity's former president and its former board chairman stated that Union Indemnity was operated as an independent insurance company separate from Hall and from Union Indemnity's former auditor who stated that the transactions between Hall and Union Indemnity were normal within the insurance industry. On the basis of these three affidavits, the Liquidator argued that the statements made in the affidavits of outside counsel could not have been conclusive admissions because they were contradicted by these statements also submitted by the Liquidator in the same action. Moreover, it was asserted, neither of the affidavits purported to be based upon firsthand knowledge inasmuch as both expressly stated that they relied upon documents and both merely restated the allegations in the Hall complaint. Neither, it was urged, was intended to support a motion for summary judgment.

By decision, dated October 16, 1989, but entered three years later on November 16, 1992, the liquidation court granted the reinsurers' motion and rescinded the insurance, finding the statements in the affidavits to be informal judicial admissions. In a second decision dated November 14, 1989 but also entered November 16, 1992, the decision was amended to add another reinsurer to those entitled to relief.

The Liquidator and Michigan then moved to renew and reargue, on the grounds that (1) the court erred in its application of the doctrine of informal judicial admissions and that, (2) the remedy of rescission was prohibited under the exclusive provisions of New York's liquidation scheme and violated public policy in that it effectively granted a prohibited preference to the reinsurers at the expense of Union Indemnity's policyholders.

Upon reargument, the court, in a third order entered November 16, 1992, adhered to its earlier determination with respect to the informal judicial admissions and the resulting finding of fraud by Union Indemnity, but modified its prior decision, finding that the reinsurers' counterclaim for rescission constituted a claim for affirmative relief which was barred by the order of liquidation, but upheld their defense of fraud in the inducement.

We agree with the liquidation court that the admissions made by counsel for the Liquidator in the Hall action constitute informal judicial admissions and, as such, are admissible against the Liquidator in this action as if they were made by the Liquidator himself, inasmuch as they are insufficiently explained or controverted and thus establish, as the court found, "that material omissions, as well as misrepresentations, occurred, that Union officers and directors were aware of the operations and financial condition of the company and that a conscious plan was in operation to utilize Union for Hall's purposes and not run the corporation as an independent entity, as required by the Insurance Law Section 1507 and 1505." As noted by the court, it is conceded that had the reinsurers been aware of Union Indemnity's insolvency, they would not have underwritten reinsurance for it, particularly in light of the greater responsibility imposed on reinsurers by Insurance Law § 1308 in the event the ceding insurer is liquidated, whereby the reinsurer must pay the Liquidator on reinsured claims even if the Liquidator has not yet paid the policyholder.

We also agree with the court's reasoning in dismissing the reinsurers' counterclaims against the Liquidator, while sustaining their affirmative defense of fraud in the inducement against him inasmuch as the counterclaim for rescission...