Midland Ins. Co., Matter of

• Decision Date: 14 May 1991
• Citation: 167 A.D.2d 75,569 N.Y.S.2d 951
• Parties: In the Matter of the Liquidation of MIDLAND INSURANCE COMPANY. KEMPER REINSURANCE COMPANY, Plaintiff-Appellant, v. James P. CORCORAN, as Superintendent of Insurance of the State of New York, Defendant-Respondent.
• Court: New York Supreme Court — Appellate Division

Page 951

569 N.Y.S.2d 951

167 A.D.2d 75

In the Matter of the Liquidation of MIDLAND INSURANCE COMPANY KEMPER REINSURANCE COMPANY, Plaintiff-Appellant, v. James P. CORCORAN, as Superintendent of Insurance of the State of New York, Defendant-Respondent.

Supreme Court, Appellate Division First Department.

May 14, 1991.

David M. Spector, of counsel (Robert C. Bata, Thomas S. Kiriakos and Ira J. Belcove, with him on the brief, Mayer, Brown & Platt, attorneys) for plaintiff-appellant,

Harold A. Kurland, of counsel (Robert B. Calihan and Judy A. Toyer, with him on the brief, Nixon, Hargrave, Devans & Doyle, attorneys) for defendant-respondent,

Reid L. Ashinoff, of counsel (Martin J. Foley, Phillip E. Stano, Robert L. Sarber, Craig A. Berrington, Richard E. Goodman and John J. Nangle, with him on the brief, Sonnenschein, Nath & Rosenthal, attorneys) on behalf of American Council of Life Ins., Reinsurance Ass'n of America, American Ins. Ass'n, The Alliance of American Insurers, and The National Ass'n of Independent Insurers as amici curiae, in support of Kemper Reinsurance Co.

Before MURPHY, P.J., and SULLIVAN, ROSENBERGER, ROSS and ASCH, JJ.

ASCH, Justice.

In 1979, Midland and two of its affiliates, entered into a First Casualty Excess of Loss Cover reinsurance treaty with Kemper. The "treaty" refers to the reinsurance of the risk by Kemper on a particular line of reinsurance relating to casualty risks. In return for Kemper's assumption of excess risk, Midland and its affiliates agreed to pay it premiums. Thereafter, in 1984, Midland issued an excess products integrity impairment and products recall insurance policy to Esmark, Inc./International Playtex, Inc. and in a Facultative Reinsurance Certificate, Kemper agreed to reinsure 75% of the risk. Facultative reinsurance is reinsurance of either a portion or the entire risk on a particular policy as opposed to a "line". This Playtex contract between the two insurers provided with respect to insolvency:

In the event of the insolvency of [Midland], reinsurance under this Agreement shall be payable by [Kemper] on the basis of the liability of [Midland] under the Reinsurance Agreement without diminution because of such insolvency, directly to [Midland] or its liquidator, receiver or statutory successor, except as otherwise specified in the statutes of any state having jurisdiction of the insolvency proceedings.

In 1985, Midland paid over $1 million in resolution of a claim arising from a product recall asserted under the Playtex policy and requested that Kemper pay 75%. On April 3, 1986, a liquidation order was entered adjudging Midland to be insolvent and Kemper brought this action in 1988 for a declaration that it was entitled to offset Treaty premiums due to it from the period 1979 to 1982 against the amount it concededly owes Midland on the Playtex contract. The Supreme Court denied Kemper's motion for summary judgment and granted the cross-motion by the Superintendent of Insurance as Liquidator of Midland for summary judgment on his counterclaim.

Insurance Law Sec. 7427 which allows setoffs provides in pertinent part:

(a) In all cases of mutual debts or mutual credits between the insurer or another person in connection with any action or proceeding under this article, such credits and debts shall be set off and the balance only shall be allowed or paid ...

The liquidation court reasoned that "mutual debts" could not arise out of different transactions such as those entered into here. Further, the court found that by virtue of the liquidation, Kemper was responsible to a new party and therefore the debts were not mutual on this ground also. Finally, the court noted that giving Kemper a setoff would be contrary to the express policy of the liquidation giving Kemper a "greater" share of the reinsurance proceeds.

The right to offset one's debts against corresponding debts owed a bankrupt was stated as early as 1675 (Anonymous, 86 Eng.Rep. 837, [K.B.]. While this right of offset would apply even in the absence of an agreement or the specific provision in the New York Insurance Law, (Sec. 7427[a] allowing it in liquidation proceedings (see, Carr v. Hamilton, 129 U.S. 252, 9 S.Ct. 295, 32 L.Ed. 669 [1889], in New York, Sec. 7427[a] [supra ] does allow such set-off as long as "mutual debts or mutual credits" are involved. As Judge Cardozo noted "to be mutual, they must be due to and from the same persons in the same capacity" (Beecher v. Vogt Mfg. Co., 227 N.Y. 468, 473, 125 N.E. 831). However, this does not require that the debts arise out of the same transaction. In fact, the mutual debts contemplated in the case of setoff are generally those arising from different transactions as opposed to recoupment which arises from the same transaction (4 Collier on Bankruptcy, Sec. 553.03 [15th Ed.] and which does not require mutuality to be asserted (id. at Sec. 553.12 [15th Ed.].

In a definitive and scholarly article on the precise issue involved here, it is noted: "... [T]he New York Insurance Department has stated that it would allow offsets only within the same reinsurance agreement. This position has been honored more in the breach than in practice and is contrary to the definition of mutuality which makes no distinction between contracts. Moreover, the leading courts have determined that offset may be applied to totally unrelated transactions. Scammon v. Kimball, [92 U.S. 362, 23 L.Ed. 483 (1876) ] involved an insolvent insurance company and an attempt by private bankers to offset the insurance company's deposits against insurance proceeds on an unrelated loss. The United States Supreme Court stated: '[s]et-off must be understood as that right which exists between two parties each of whom, under an independent contract, owes an ascertained amount to the other to set off their respective debts by way of mutual deduction ...' [id., 92 U.S. at 367]. Other cases and commentators are in accord." The Reinsurer's Liability in the Event of the Insolvency of a Ceding Property and Casualty Insurer, Semple and Hall, XXI Tort Insurance Law Journal, 407 (footnotes omitted).

The cases cited by the IAS court in its decision that debts arising out of different transactions are not "mutual" and an offset is not "appropriate" do not support such a conclusion. In Pink v. Title Guarantee & Trust Co., 274 N.Y. 167, 8 N.E.2d 321, the Court of Appeals would not allow offset since the action by the Superintendent of Insurance was brought to disaffirm the fraudulent transfer of mortgages. That case reaffirmed the holding of New York Title & Mortgage Co. v. Irving Trust Co., 268 N.Y. 547, 198 N.E. 397, Rearg. den., 268 N.Y. 709, 198 N.E. 569, that such offsets are allowable "on contract" (id., 274 N.Y. at 172-173, 8 N.E.2d 321). In Pink v. American Surety Co., 283 N.Y. 290, 28 N.E.2d 842, the moneys owed to the insolvent estate were the result of salvage--proceeds received by defendant insurer for the purpose of reimbursing the reinsured and reinsurer for losses sustained by defendant as a trustee and thus no relation of debtor and creditor arose. Further, the losses insured by defendant under its surety bond which it sought to offset had no connection with the reinsurance contracts and arose subsequent to the appointment of the plaintiff as Liquidator. In Matter of People v. Consolidated Indemnity and Insurance Company, 287 N.Y. 34, 38 N.E.2d 119, once again, the Court of Appeals found that as to a salvage fund the reinsured is a trustee for the reinsurer and no relation of debtor and creditor is thus created which may be offset against other obligations. Similarly, in Superintendent of Insurance of New York v. Baker & Hostetler, 668 F.Supp. 1057, aff'd, w/o opinion, 826 F.2d 1065, the federal court of the Northern District of Ohio found a law firm could not offset legal fees owed to it against moneys and documents owed to the insurer since these moneys and documents were held "in trust" for the insurer. In Harnett v. National Motorcycle Plan, Inc., 59 A.D.2d 870, 399 N.Y.S.2d 242, this court found no offset applicable where...