In The Matter of The Liquidation of Freestone Insurance Company

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN THE MATTER OF THE LIQUIDATION ) C.A. No. 9574-VCL
OF FREESTONE INSURANCE COMPANY )
OPINION
Date Submitted: April 18, 2016
Date Decided: July 7, 2016
Diane J. Bartels, DIANE J. BARTELS LAW OFFICE, Wilmington, Delaware; James J.
Black, Jeffrey B. Miceli, Mark W. Drasnin, BLACK & GERNGROSS, PC, Philadelphia,
Pennsylvania; Counsel for the Honorable Karen Weldin Stewart, CIR-ML, Insurance
Commissioner of the State of Delaware, in her capacity as Receiver of Freestone
Insurance Company in Liquidation.
Eric Lopez Schnabel, Robert W. Mallard, Alessandra Glorioso, DORSEY & WHITNEY
LLP, Wilmington, Delaware; Michael B. Fisco, Michael M. Krauss, FAEGRE BAKER
DANIELS LLP, Minneapolis, Minnesota; Counsel for U.S. Bank National Association.
LASTER, Vice Chancellor.
Freestone Insurance Company (“Freestone”) is a Delaware-domiciled insurer that
has been placed in liquidation. The liquidation proceeding is governed by the Uniform
Insurers Liquidation Act (the “Uniform Act”), which Delaware adopted in 1953.
Under the Uniform Act, the chief insurance regulator in the domiciliary state
oversees the liquidation process. Only the regulator can initiate liquidation proceedings in
the domiciliary state. Once a court has placed the insurer in liquidation, the regulator
takes charge of the insurer‟s operations and marshals its assets. The regulator also
manages a statutory process for receiving, evaluating, and paying claims (the “Claims
Process”).
To facilitate the fair and equitable resolution of claims, the Uniform Act
establishes a priority scheme with nine classes. Payments are made in order of priority by
class and ratably among claimants within the same class. Claims covered by policies
issued by the insurer fall under Class III. Claims of general creditors fall under Class VI.
General creditors whose claims remained contingent as of the deadline for filing claims
cannot recover anything unless it turns out that the insurer actually had a surplus.
As contemplated by the Uniform Act, the Insurance Commissioner of the State of
Delaware (the “Commissioner”) is serving as the receiver for Freestone. The
Commissioner has taken over Freestone‟s operations and has been marshaling its assets.
The Commissioner established a bar date for receiving claims and has been evaluating
the claims received. As authorized by the Uniform Act, and as is customary in insurance
liquidation proceedings, the order that placed Freestone into liquidation contained an
1
injunction barring third parties from pursuing any claims against Freestone other than
through the Claims Process (the “Anti-Suit Injunction”).
U.S. Bank National Association (the “Bank”) has moved to lift the Anti-Suit
Injunction. The Bank wishes to litigate against Freestone outside of the Claims Process,
reduce its currently contingent claims to judgment, and thereby establish the amount of
its claims and its status as a general creditor of Freestone.
The Bank served as the trustee under a reinsurance trust agreement (the “Trust
Agreement”) between Freestone and Companion Property and Casualty Company
(“Companion”). The Trust Agreement secured a reinsurance arrangement that allowed
Freestone to do business through Companion in jurisdictions where Freestone was not
qualified to sell insurance. Under that arrangement, Companion wrote policies on
Freestone‟s behalf, and Freestone reinsured the risk on the policies Companion wrote.
To secure its payment obligations, Freestone agreed under the Trust Agreement to
place collateral in a trust account for Companion‟s benefit. In its capacity as trustee, the
Bank had various obligations regarding the collateral. According to Companion, the Bank
breached its obligations by permitting Freestone to place poor quality collateral in the
trust account. When Freestone failed to make its reinsurance payments, Companion
sought to access the collateral. The value of the collateral was insufficient to cover the
claims being made on the underlying policies, and Companion has sued the Bank in
federal court in South Carolina to recover damages (the “South Carolina Action”).
As part of the Claims Process, the Bank has filed two claims notices against
Freestone that relate to the South Carolina Action. But in addition to pursuing its claims
2
through the Claims Process, the Bank wishes to name Freestone as a third-party
defendant in the South Carolina Action itself. The Bank wants to sue Freestone in that
proceeding for contribution and indemnification, and it hopes to obtain a judgment. The
Bank represents that it would not seek to execute on the judgment outside of the
liquidation proceeding.
The Bank has asked this court to lift the Anti-Suit Injunction so that the Bank can
assert and pursue its third-party claims against Freestone. Granting that relief on the facts
presented would contravene the policies of the Uniform Act, interfere with the Claims
Process, and impose unnecessary and unwarranted costs on Freestone and the
Commissioner. The Bank‟s motion to lift the Anti-Suit Injunction is denied.
I. FACTUAL BACKGROUND
The factual background is drawn from the submissions made by the parties in
connection with the Bank‟s motion. The material facts are undisputed.
A. Freestone And Companion Enter Into Reinsurance Agreements.
Beginning in 2005, Freestone and Companion entered into a series of reinsurance
agreements pursuant to which Companion acted as a fronting insurer for Freestone.1 The
arrangement enabled Freestone to sell insurance in jurisdictions where Freestone was not
qualified to do business by allowing Freestone to sell policies issued by Companion,
1
At the time, Freestone was a Texas-domiciled insurer known as Dallas National
Insurance Company. In 2013, Dallas National re-domiciled in Delaware and changed its
name to Freestone. The parties use its current name, so this decision does too. The parties
took the opposite approach with Companion, which is now known as Sussex Insurance
Company. The parties call it Companion, and this decision follows their lead.
3
which had the necessary qualifications. Under the terms of the reinsurance agreements,
Companion retained a portion of the premium charged for the policies and ceded the rest
of the premium to Freestone. In return, Freestone agreed to reinsure Companion for
100% of the risk of loss on the policies. Companion effectively received a fee for letting
Freestone use its name, with the expectation that Freestone would pay any claims under
the policies.
Companion understandably wanted security for Freestone‟s promise to pay. To
provide that security, Freestone, Companion, and the Bank entered into the Trust
Agreement.2 Under its terms, Freestone agreed to deposit collateral sufficient to cover its
obligations to Companion with the Bank, which agreed to hold the collateral as trustee
for the benefit of Companion.
Under the terms of the Trust Agreement, the Bank had to comply with Freestone‟s
instructions regarding the collateral. For example, Section 4(c) of the Trust Agreement
stated: “[Freestone] may direct [the Bank] to substitute Assets of comparable value for
other Assets presently held in the Trust Account with written notification to
[Companion].” It also specified that “[the Bank] shall comply with any such direction.”
At the same time, Section 7(b) of the Trust Agreement provided that
2
Technically, the Bank agreed to become the successor trustee under a pre-
existing trust agreement. That distinction is not important for the current motion, so this
decision passes over it. The trust arrangement that Freestone, Companion, and the Bank
created is not uncommon. See Nat‟l Ass‟n of Ins. Comm‟rs, Receiver’s Handbook for
Insurance Company Insolvencies 410-11 (2016) [hereinafter Receiver’s Handbook]
(providing generic description of arrangement in which trust fund is used to secure
payment obligations and identifying related issues for delinquency proceedings).
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[b]efore accepting any Asset submitted for deposit to the Trust Account,
[the Bank] shall determine that such Asset is in such form that
[Companion] whenever necessary may . . . negotiate such Asset without
consent or signature from [Freestone] or any person or entity other than [the
Bank] in accordance with the terms of this Agreement.
Under Section 7(f) of the Trust Agreement, the Bank also was responsible for providing
Companion with a monthly account statement identifying the assets in the Trust Account,
and the account statement was deemed “a certification of [the Bank] that the fair market
value of the Assets in the Trust Account is true and correct according to the best
information and belief of [the Bank].”
Section 4(c) further stated that in connection with any substitution of assets,
Companion was entitled to rely on the following representation and warranty from
Freestone:
Each time that [Freestone] provides [the Bank] with [a] substitution
direction it shall be considered a representation and warranty of [Freestone]
that (i) the substitute Assets are Eligible Securities or cash, and (ii) [the
Bank] has determined that the fair market value of the substituted Assets is
not less than the fair market value of the Assets being replaced thereby.
Section 11 of the Trust Agreement defined “Eligible Securities” as cash, certificates of
deposit, or other investments that insurance companies were permitted to hold under
South Carolina insurance law. Under Section 7(c) of the Trust Agreement, the Bank had
no “responsibility whatsoever to determine that any Assets in the Trust Account are or
continue to be Eligible Securities.”
As these excerpts from the Trust Agreement show, the document reflects a
negotiating dynamic in which the Bank sought to limit its exposure by having as few
contractual obligations as possible, while Companion sought to protect itself by imposing
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obligations on both the Bank and Freestone. This decision need not and does not express
any view on the meaning of or interrelationships among the competing contractual
obligations, nor their interactions with common law principles or equitable doctrines.
Section 12 of the Trust Agreement stated that “any action or proceeding brought
by [Freestone] arising out of or relating to this Agreement must be, and any action or
proceeding brought by [the Bank] or [Companion] may be, brought in the Federal Court
of South Carolina.” For Freestone, the choice of forum clause was mandatory. For the
Bank and Companion, it was permissive.
B. The Southport Entities Acquire Freestone.
In 2013, entities affiliated with Southport Lane Advisors acquired Freestone. At
the time, Southport and its affiliates were controlled by Southport‟s co-founder, then-
majority owner, and then-chief strategist, Alexander Chatfield Burns. Under Burns‟
leadership, Southport pursued aggressive strategies.
On April 24, 2014, the Commissioner petitioned to place Freestone into
rehabilitation, averring that Freestone was “impaired, in unsound condition, and in such
condition as to render its further transaction of insurance presently or prospectively
hazardous to its policyholders.” Dkt. 1 ¶ 14. Freestone did not oppose the petition and
consented to entry of a rehabilitation order.
The Commissioner subsequently petitioned to place Freestone into liquidation. By
order dated July 22, 2014, this court granted that relief. Dkt. 68 (the “Liquidation
Order”). As contemplated by the Uniform Act, the Liquidation Order appointed the
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Commissioner as receiver. The Liquidation Order included the Anti-Suit Injunction,
which provided as follows:
All persons and entities that have notice of these proceedings or of this
Order are hereby prohibited from instituting or further prosecuting any
action at law or in equity, including but not limited to any arbitration or
mediation, or other proceedings against FREESTONE [or the]
Commissioner as Receiver . . . or from obtaining preferences judgments,
attachments, or other like liens or encumbrances, or foreclosing upon or
making any levy against FREESTONE or the Assets, or exercising any
right adverse to the right of FREESTONE to or in the Assets, or in any way
interfering with the Receiver . . . either in [her] possession and control of
the Assets or in the discharge of [her] duties hereunder.
Id. ¶ 11.
In accordance with the Uniform Act, the Liquidation Order instructed the
Commissioner to marshal Freestone‟s assets and conduct the Claims Process. The
Liquidation Order set a bar date of December 31, 2015, for parties to file notices of
claims against Freestone.
C. Companion Sues The Bank.
On March 20, 2015, Companion sued the Bank in the South Carolina Action.
Companion‟s complaint alleged that “the Bank allowed the Trust Account[] to be
depleted of Eligible Securities, including investments in reputable bonds and stocks, and
instead the Trust Account[] now hold[s] securities that are illiquid and appear to have
little to no value.” Dkt. 251, Ex. 2 ¶ 36. Companion alleged that between May 2013 and
January 2014, Freestone instructed the Bank to replace relatively liquid and secure assets
in the Trust Account with less liquid and less secure interests in non-public entities,
resulting in the value of the collateral in the Trust Account declining from approximately
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$73 million in January 2013 to approximately $55 million in March 2014. Companion
contended that the $55 million figure was itself inflated and that that the actual value of
the collateral was much lower. Companion alleged that the Bank
negligently, grossly negligently, recklessly, willfully, and/or wantonly
allowed . . . Freestone to substitute into the Trust Account collateral Assets
that were not of comparable value and without any independent
determination that the fair market value of the substituted Assets [wa]s not
less than the fair market value of the Assets being replaced.
Dkt. 251, Ex. 2 ¶ 25 (quotation marks omitted). Companion contended that by doing so,
the Bank breached Sections 4(c) and 7(b) of the Trust Agreement.
On May 18, 2015, the Bank moved to dismiss the complaint, arguing that it
merely followed Freestone‟s instructions and could not be held liable under the terms of
the Trust Agreement. On November 24, 2015, the United States District Court for the
District of South Carolina (the “South Carolina Court”) largely denied the motion. See
Companion Prop. v. U.S. Bank Nat’l Ass’n, 2015 WL 7568613 (D.S.C. Nov. 24, 2015).
D. The Bank Files Claims Notices, Then Seeks Leave To Sue Freestone In The
South Carolina Action.
On December 31, 2015, the Bank filed two claims notices as part of the Claims
Process. Both related to the South Carolina Action.
The Bank filed the first claims notice in its capacity as trustee under the Trust
Agreement. That notice asserted claims on behalf of Companion, the Bank‟s beneficiary,
to the extent that Companion “suffered damages as a result of actions or inactions of
Freestone, including, but not limited to, the direction of Freestone or its agent to purchase
assets placed in the Companion Reinsurance Trust.” Dkt. 256, Ex. C at A-2.
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The Bank filed the second claims notice on its own behalf. That notice sought to
recover any losses that the Bank incurred in the South Carolina Action, including for
attorneys‟ fees and costs. The Bank contended that Freestone was liable to the Bank on
theories of contribution, indemnification, apportionment, breach of the Trust Agreement,
negligence, gross negligence, negligent misrepresentation, and fraud.
But the Bank did more than just file claims notices. On January 15, 2016, the Bank
moved in this court for relief from the Anti-Suit Injunction so that it could name
Freestone as a third-party defendant in the South Carolina Action. Through that litigation,
the Bank seeks to obtain a judgment against Freestone that will establish its status as a
general creditor and the amount of its claim. The Bank has represented that if it is
successful, it will not seek to execute on the judgment but will return to this court to
liquidate its claims as part of the Claims Process.
On January 29, 2016, the Bank filed a third-party complaint in the South Carolina
Action that named Southport and Burns, among others, as third-party defendants.
Because of the Anti-Suit Injunction, the Bank did not name Freestone as a third-party
defendant, but the allegations in its pleading identified Freestone as a wrongdoer
alongside Southport and Burns. According to those allegations, Freestone, Southport, and
Burns
directed the conduct that underlies Companion‟s claims. They caused the
trusts to acquire assets that Companion now says were ineligible, they gave
valuations that Companion now says were inflated, and they made
representations and warranties that Companion now says were false.
Meanwhile, Burns and his Southport affiliates created the assets, sold or
contributed the assets to the reinsurance trust[], and received the financial
benefits of the transactions.
9
Dkt. 256, Ex. A ¶ 2. The Bank asserted that if it was liable to Companion, then Southport
and Burns should be liable for apportionment, contribution, and contractual and equitable
indemnification.
II. LEGAL ANALYSIS
The question to be answered is whether this court should lift the Anti-Suit
Injunction so that the Bank can litigate third-party claims against Freestone in the South
Carolina Action, outside of the Claims Process. This decision does not take any position
on the merits of the Bank‟s claims, including the allegations against Freestone. This
decision assumes that the claims are fairly litigable.
There is a dearth of case law addressing when a court overseeing a liquidation
proceeding under the Uniform Act should lift an anti-suit injunction. Only one Delaware
decision has considered such a motion. See In re Rehab. of Manhattan Re-Ins. Co.
(Manhattan Re), 2011 WL 4553582 (Del. Ch. Oct. 4, 2011). The Manhattan Re decision
holds, and the parties agree, that this court has the “the discretion to lift the preliminary
injunction.” Id. at *8. The Manhattan Re decision also holds, and the parties agree, that
the central inquiry is whether lifting the injunction “would not be inconsistent with the
[Uniform Act] or its goal[s].” Id. at *5. Unfortunately, the Manhattan Re decision did not
provide a framework for applying this standard or identify factors to consider. The
parties‟ initial round of briefing did not offer any assistance either.
In an effort to find guidance in a seemingly similar legal scenario, the court
requested supplemental briefing from the parties on the factors that bankruptcy courts
consider when deciding whether to lift the automatic stay to permit lawsuits to proceed in
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other jurisdictions. Important distinctions between a bankruptcy proceeding and an
insurance company liquidation prevent the wholesale adoption of the bankruptcy model.
Most significantly, an insurance company liquidation involves a highly regulated debtor,
and the Uniform Act evidences an overarching policy of centralizing proceedings in the
domiciliary jurisdiction under the direction of the chief insurance regulator for that state.
If anything, therefore, it should be more difficult to obtain relief from an anti-suit
injunction in a liquidation proceeding than it is to obtain relief from the automatic stay in
a bankruptcy proceeding.
Informed by bankruptcy court precedent, this decision weighs multiple factors in
determining whether to lift the Anti-Suit Injunction to enable the Bank to name Freestone
as a third-party defendant in the South Carolina Action. Having done so, this decision
concludes that the balancing counsels against lifting the Anti-Suit Injunction. The Bank‟s
motion is therefore denied.3
3
This decision thus assumes for purposes of analysis that the Uniform Act permits
a claimant that is subject to this court‟s jurisdiction or is a citizen of a reciprocal state to
litigate a claim against an insolvent insurer in a civil action outside of the liquidation
process, whether via a claim, counterclaim, or third-party claim. It therefore treats the
operative question as whether, in its discretion, this court should permit the Bank to do
so. In my view, the better reading of Sections 5914, 5915, and 5916 of the Uniform Act is
that once an insurer has been placed in liquidation, claimants that are citizens of either the
domiciliary state or a reciprocal state or otherwise subject to the jurisdiction of the
domiciliary court only can pursue claims by filing claims notices either with the
domiciliary receiver or, if applicable, an ancillary receiver appointed in a reciprocal state
through ancillary proceedings. 18 Del. C. §§ 5914-5916. A series of federal and state
decisions have interpreted the provisions of the Uniform Act in this fashion. See, e.g.,
Sears & Roebuck & Co. v. Northumberland Gen. Ins. Co., 617 F. Supp. 88, 89 (N.D. Ill.
1985); Emons Indus., Inc. v. Liberty Mut. Fire Ins. Co., 545 F. Supp. 185, 190-91
(S.D.N.Y. 1982); Ins. Affiliates Inc. v. O’Connor, 522 F. Supp. 703, 706 (D. Colo. 1981);
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Ace Grain Co v. R.I. Ins Co., 107 F. Supp. 80, 82-83 (S.D.N.Y. 1952), aff’d, 199 F.2d
758 (2d Cir. 1952); Fin. Int’l Life Ins. Co. v. Beta Tr. Corp. Ltd., 405 So. 2d 306, 308
(Fla. Dist. Ct. App. 1981); Integrity Ins. Co. v. Martin, 769 P.2d 69, 70 (Nev. 1989);
Superintendent of Ins. of N.Y. v. Int’l Equip. Leasing, Inc., 588 A.2d 863, 886 (N.J.
Super. Ct. App. Div. 1991); Zullo Lumber v. King Constr., 368 A.2d 987, 990-91 (N.J.
Super. Ct. Law Div. 1976); Levin v. Nat’l Colonial Ins. Co., 806 N.E.2d 473, 478-79
(N.Y. 2004); G.C. Murphy Co. v. Reserve Ins. Co., 429 N.E.2d 111, 115 (N.Y. 1981).
Commentators have expressed the same view. See Receiver’s Handbook, supra, at 17, 28;
Eric P. Berg, Injunctions Barring Suit Against Insolvent Insurance Companies: State
Cooperation Through Tit-for-Tat Strategy, 57 Rutgers L. Rev. 1377, 1386 (2005); John
N. Gavin, Competing Forums for the Resolution of Claims Against an Insolvent Insurer,
23 Tort & Ins. L.J. 604, 606-07 (1988); Stephen W. Schwab et al., Cross-Border
Insurance Insolvencies: The Search for a Forum Concursus, 12 U. Pa. J. Int‟l. Bus. L.
303, 319 (1991). So do black letter authorities. See 43 Am. Jur. 2d Insurance § 86 (2016);
44 C.J.S. Insurance §§ 241, 248 (2016); 1 Steven Plitt et al., Couch on Insurance §§
6:14, 6:15 (3d ed. 2016) [hereinafter Couch on Insurance].
The Bank reads Manhattan Re as authorizing a claimant to pursue a civil claim
against a delinquent insurer in a reciprocal jurisdiction outside of the liquidation process
as long as the claim is in personam, rather than in rem, and so long as this court has not
entered an anti-suit injunction or lifts the injunction to permit the claim to proceed. Such
a reading would conflict with the authorities cited in the preceding paragraph. I do not
read Manhattan Re so broadly.
First, Manhattan Re did not involve a claim that otherwise would have been
handled through the Claims Process. As discussed in detail below, Manhattan Re
involved an objection to a plan of rehabilitation that turned on whether and to what
degree a particular asset was the property of the delinquent insurer‟s estate. See infra Part
II.E. That issue was part of the marshaling of the delinquent insurer‟s assets and was
logically separate from and prior to the adjudication of claims. As a temporal matter in
Manhattan Re, the question of ownership was deferred until the Commissioner sought
approval of the plan of rehabilitation, but one can readily infer that it was deferred for
administrative convenience, in the hope that the parties would resolve the issue, and
because the ownership issue did not affect the handling of any other claims. The
ownership issue that Manhattan Re held could be adjudicated outside of the Claims
Process thus would not have been handled through the Claims Process in any event.
Second, Manhattan Re at most might be read to permit claims that are secured or
involve statutory deposits to be litigated outside of the Claims Process. The objector in
Manhattan Re was a reinsurer who argued that its claims were secured by the cash
proceeds from a letter of credit that the delinquent insurer had drawn and placed in a
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A. The Centralized, State-Based Regulatory Scheme For Insurer Liquidations
Under the Manhattan Re decision, the overarching inquiry when considering
whether to lift an anti-suit injunction in a delinquency proceeding is whether doing so
“would not be inconsistent with the [Uniform Act] or its goal[s].” 2011 WL 4553582, at
*5. An understanding of the Uniform Act and the policies it seeks to achieve is therefore
essential to determining whether to lift the stay.
designated account. The objector argued that the question of ownership was an in
personam claim that could be litigated outside of the delinquency proceeding, citing in
support the provisions of the Uniform Act which permit owners of claims against special
deposits or other secured claims to assert their claims in ancillary proceedings. The
concept of ancillary proceedings in the Uniform Act contemplates an ancillary Claims
Process handled by an ancillary receiver in a reciprocal state. See Receiver’s Handbook,
supra, at 17-18. The Manhattan Re decision, however, appears to have accepted the
claimant‟s argument that these provisions contemplated any type of proceeding outside of
the delinquency proceeding in the domiciliary state. 2011 WL 4553582, at *7. Were one
to embrace that view, it only would extend to claims that are secured or involve statutory
deposits. It would not apply to general creditors like the Bank.
In this case, the Bank has a contingent claim which, if proven, would give it the
status of a general creditor. South Carolina appears to be a reciprocal state. Compare 18
Del. C. § 5901(8), with S.C. Code Ann. §§ 38-27-50(15). Under the plain language of the
Uniform Act, it appears that the Bank must pursue its claims exclusively through the
Claims Process in this state, unless the chief insurance regulator in South Carolina has
brought ancillary proceedings and been appointed as an ancillary receiver, in which case
the Bank could file claims notices with the ancillary receiver. There is no indication that
an ancillary receiver has been appointed, and the Bank is not proposing to pursue claims
with an ancillary receiver in South Carolina.
Although the Uniform Act appears to foreclose the Bank‟s proposed course as a
matter of law, at a minimum for general creditors in reciprocal states, this decision does
not deny the Bank‟s motion on that basis. This decision assumes for purposes of analysis
that the Bank could proceed against Freestone in South Carolina absent the Anti-Suit
Injunction and limits its holding to the discretionary question of whether to lift the Anti-
Suit Injunction.
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“Insurer insolvency is regulated by state law rather than the federal Bankruptcy
Code.” Cohen v. State, 89 A.3d 65, 72 (Del. 2014) (footnote omitted). In 1945, Congress
adopted the McCarran-Ferguson Act, 15 U.S.C. §§ 1011-15, to reverse a decision by the
United States Supreme Court that applied the Sherman Act to insurance companies. See
United States v. S.-E. Underwriters Ass’n, 322 U.S. 533 (1944). Section 1 of the
McCarran-Ferguson Act declares that state regulation of the “business of insurance is in
the public interest.” 15 U.S.C. § 1011. Section 2(a) declares that the “business of
insurance . . . shall be subject” to state laws relating to the “regulation . . . of such
business.” 15 U.S.C. § 1012(a). Section 2(b) states that “[n]o Act of Congress shall be
construed to invalidate, impair, or supersede any law enacted by any State for the purpose
of regulating the business of insurance.” 15 U.S.C. § 1012(b). The United States Supreme
Court has recognized that “[o]bviously Congress‟ purpose was broadly to give support to
the existing and future state systems for regulating and taxing the business of insurance.”
Prudential Ins. Co. v. Benjamin, 328 U.S. 408, 429 (1946).
In addition to Congress‟ decision in the McCarran-Ferguson Act to leave the
“business of insurance” to the states, Congress carved out insurance companies from the
purview of federal bankruptcy law (the “Bankruptcy Code”). 11 U.S.C. § 109(b). As a
result, the states have primary responsibility for regulating insurance, including insurance
company insolvency proceedings.
To address this important area, “[m]any states, including Delaware, have adopted
a form of the Uniform Insurers Liquidation Act.” Cohen, 89 A.3d at 72. The National
Conference of Commissioners on Uniform State Laws (“NCCUSL”) promulgated the
14
Uniform Act in 1939 with the assistance of the American Bar Association, the National
Association of Insurance Commissioners (“NAIC”), the insurance departments of several
states, and other qualified experts. See Commissioner‟s Prefatory Note, Uniform Insurers
Liquidation Act, 9B U.L.A. 284, 286 (1966). Since then, as many as thirty-two
jurisdictions have adopted it.4 When the General Assembly enacted the Uniform Act in
4
Lac D’Amante du Quebec, Ltee. v. Am. Home Assur. Co., 864 F.2d 1033, 1039
(3d Cir. 1988). Research has not uncovered a source that tracks the number of
jurisdictions that currently adhere to the Uniform Act. NCCUSL no longer maintains the
Uniform Act, having ceded the task to the NAIC. The NAIC has promulgated two more
recent statutes: the Insurers Rehabilitation and Liquidation Model Act (the “Model Act”),
and the Insurer Receivership Model Act (“IRMA”). Receiver’s Handbook, supra, at 5.
The NAIC initially adopted the Model Act in 1968 as an updated version of the
Uniform Act, and then amended it several times before it was replaced by IRMA in 2005.
Id. at 463. “Ten sections (54-63) of the Model Act adopt much of the [Uniform Act], as
well as its policy objective: centralization of delinquency proceedings in the domiciliary
jurisdiction.” Id. at 466-67; accord Schwab, supra, at 325 (explaining that the Model Act
adopts “much of the basic terminology and procedure of the [Uniform Act], as well as the
same universalist policy objective: centralization of delinquency proceedings in the
domiciliary jurisdiction”); see Berg, supra, at 1379, 1384 (describing the Model Act as
“more detailed” and “more comprehensive” than the Uniform Act but as providing “a
framework supporting the same policies”). “Differences between the two statutes derive
from the NAIC‟s efforts to clarify and improve [Uniform Act] provisions.” Schwab,
supra, at 325. The NAIC promulgated IRMA in 2005 as an updated version of the Model
Act. Receiver’s Handbook, supra, at 463.
One authority states that “each of the fifty states and the District of Columbia have
enacted a version of either the” Uniform Act or the Model Act. 5 J. David Leslie &
Martin C. Pentz, Law & Practice of Insurance Coverage Litigation § 58:2 (2016).
Another authority observes that in 2005, twenty-three states still followed the Uniform
Act, while thirty-three states had adopted the Model Act, either in place of or in addition
to the Uniform Act. Berg, supra, at 1304. IRMA does not appear to have changed matters
much. Texas and Utah have adopted IRMA in full, and Maine, Oklahoma, Missouri, and
Tennessee have adopted parts of it. NAIC Model Regulation Serv., Insurer Receivership
Model Act, at ST-555-3 to -8 (2015), http://www.naic.org/store/free/MDL-555.pdf.
15
1953, it instructed that the Delaware statute be “so interpreted and construed as to
effectuate its general purpose to make uniform the laws of those states that enact it.”5
The Uniform Act “was enacted in response to the economic depression
experienced in the United States in the 1920s and 30s. The depression resulted in the
forced liquidation or reorganization of numerous insurance companies, and the ensuing
receivership proceedings were plagued by many problems.” Schwab, supra, at 310.
Among other things, differences in the state-law regimes “resulted in inequality in
distribution to creditors because of variation from state to state in the laws relating to
priorities and in the relative proportions of local assets to local creditors.” 1 Couch on
Insurance § 6:14. The Uniform Act “was enacted in order to avoid the confusion inherent
in the forced liquidation of a multistate insurance corporation, especially with regard to
assets in foreign jurisdictions.” Jay M. Zitter, Annotation, Validity, Construction, and
Application of Uniform Insurers Liquidation Act, 44 A.L.R. 5th 683 (1996). The drafters
identified six specific “embarrassments” that the Uniform Act sought to address:
(1) the inefficient administration of the liquidation process caused by the
appointment of receivers other than the various State Insurance
Commissioners;
In light of this history, the jurisdictions that have adopted the Uniform Act, the
Model Act, and IRMA can be regarded generally as having enacted versions of the
Uniform Act and hence as reciprocal states, at least absent a specific showing that a
particular jurisdiction departed materially from the models. See Receiver’s Handbook,
supra, 5, 463-69.
5
18 Del. C. § 5920(b). The entirety of Title 18, Chapter 59 of the Delaware code
is devoted to insurance regulation. Technically only Sections 5901(2)-(13), 5902, 5903,
and 5913-5920 implement the Uniform Act. 18 Del. C. § 5920(a).
16
(2) the lack of authority on the part of domiciliary receivers to proceed
in non-domiciliary States leading to the dissipation of assets outside
the home State and enabling out-of-State debtors to avoid their
obligations;
(3) the ineffective administration of the liquidation process caused by
differences in the laws of the various States regarding the title and
right to possession of the property of a defunct nonresident insurer;
(4) the serious inconvenience in proving claims experienced by creditors
living outside the defunct insurer‟s domicile;
(5) the problems generated by diverse State laws governing preferences
such as wage claims, compensation claims and tax claims; and
(6) the inequity resulting from preferences obtained by diligent
nondomiciliary creditors with advance information of an insurer‟s
impending insolvency.
G.C. Murphy Co. v. Reserve Ins. Co., 429 N.E.2d 111, 114-15 (N.Y. 1981) (formatting as
separate paragraphs added). To address these and other problems, the Uniform Act
centralized the liquidation proceeding under the control of the chief insurance regulator in
the domiciliary state. Receiver’s Handbook, supra, at 464.
Multiple features of the Uniform Act evidence the importance of centralizing the
liquidation of an insurer under the control of the chief insurance regulator in the
domiciliary jurisdiction. First, only the domiciliary regulator has authority to bring a
statutory liquidation proceeding within the domiciliary jurisdiction, and such a
proceeding is the exclusive means for liquidating an insolvent insurer. Delaware‟s statute
illustrates both concepts. It gives the Commissioner sole control of the initiation of
delinquency proceedings by providing that
[t]he Commissioner shall commence any such proceedings by application
to the court for an order directing the insurer to show cause why the
Commissioner should not have the relief prayed for. On the return of such
17
order to show cause and after a full hearing, the court shall either deny the
application or grant the application, together with such other relief as the
nature of the case and the interests of the policyholders, creditors,
stockholders, members, subscribers or the public may require.
18 Del. C. § 5903. The words “such proceedings” refer to the immediately preceding
statutory section, which makes statutory delinquency proceedings the exclusive means
for liquidating a Delaware-domiciled insurer:
Delinquency proceedings pursuant to this chapter shall constitute the sole
and exclusive method of liquidating, rehabilitating, reorganizing or
conserving an insurer, and no court shall entertain a petition for the
commencement of such proceedings unless the same has been filed in the
name of the State on the relation of the Commissioner.
Id. § 5902(d).
Second, under the Uniform Act, only the chief insurance regulator in the
domiciliary jurisdiction can serve as the receiver for the insolvent insurer. The Delaware
statute again exemplifies this approach by stating:
Whenever under this chapter a receiver is to be appointed in delinquency
proceedings for an insurer, the court shall appoint the Commissioner as
such receiver. The court shall order the Commissioner forthwith to take
possession of the assets of the insurer and to administer the same under the
orders of the court.
Id. § 5913(a).
Third, the Uniform Act mandates that the chief insurance regulator takes charge of
the insolvent insurer‟s business, marshals its assets, and oversees the insolvency
proceeding. The Delaware statute provides as follows:
An order to liquidate the business of a domestic insurer shall direct the
Commissioner forthwith to take possession of the property of the insurer, to
liquidate its business, to deal with the insurer‟s property and business in the
Commissioner‟s own name as Insurance Commissioner or in the name of
18
the insurer, as the court may direct, and to give notice to all creditors who
may have claims against the insurer to present such claims.
Id. § 5911(a). Elsewhere, the Delaware statute reiterates this point by stating that when
the Commissioner is appointed as receiver,
the Commissioner shall be vested by operation of law with the title to all of
the property, contracts and rights of action and all of the books and records
of the insurer, wherever located, as of the date of entry of the order
directing the Commissioner to . . . liquidate a domestic insurer . . . , and the
Commissioner shall have the right to recover the same and reduce the same
to possession, except that ancillary receivers in reciprocal states shall have,
as to assets located in their respective states, the rights and powers which
are herein prescribed for ancillary receivers appointed in this State as to
assets located in this State.
Id. § 5913(b). The Delaware statute further provides that
[u]pon taking possession of the assets of an insurer, the domiciliary receiver
shall, subject to the direction of the court, immediately proceed to conduct
the business of the insurer or to take such steps as are authorized by this
chapter for the purpose of . . . liquidating . . . the affairs or assets of the
insurer.
Id. § 5913(e).
Fourth, the Uniform Act places the chief insurance regulator at the center of the
Claims Process, which establishes a mechanism for filing, processing, and paying claims
in accordance with a statutory prioritization scheme. The statute mandates that all claims
be filed with the Commissioner on or before a bar date set by the court. See id. § 5917(b)
(“All claims filed in this State shall be filed with the receiver, whether domiciliary or
ancillary, in this State on or before the last date for filing as specified in this chapter.”).
Notably, the statute does not contemplate that the court will resolve the claims in the first
instance. Instead, the statute envisions that the initial step is for the Commissioner to
19
make a recommendation regarding the claim; only then does the court entertain the claim
and rule on it.6 A sense of the complexity of the Claims Process can be gleaned from the
Receiver’s Handbook, which devotes sixty-five pages to the subject. See Receiver’s
Handbook, supra, at 239-304.
The Uniform Act recognizes that because of the jurisdictional limitations of the
domiciliary state, it may be necessary for the chief regulator in the domiciliary state to
coordinate with insurance regulators in other states by having those regulators serve as
ancillary receivers if the insolvent insurer has significant assets located in their
jurisdictions.7 When this occurs and an ancillary receiver has been appointed in another
6
The relevant sections state:
(c) Within 10 days of the receipt of any claim or within such further period
as the court may fix for good cause shown, the receiver shall report the
claim to the court, specifying in such report the receiver‟s recommendation
with respect to the action to be taken thereon. Upon receipt of such report,
the court shall fix a time for hearing the claim and shall direct that the
claimant or the receiver, as the court shall specify, shall give such notice as
the court shall determine to such persons as shall appear to the court to be
interested therein. All such notices shall specify the time and place of the
hearing and shall concisely state the amount and nature of the claim, the
priorities asserted, if any, and the recommendation of the receiver with
reference thereto.
(d) At the hearing, all persons interested shall be entitled to appear and the
court shall enter an order allowing, allowing in part, or disallowing the
claim. Any such order shall be deemed to be an appealable order.
Id. § 5917(c) & (d).
7
See Receiver’s Handbook, supra, at 17-18, 27-28; cf. 18 Del. C. § 5914(a)
(establishing reciprocal mechanism in Delaware for insolvency proceedings involving a
foreign insurer by providing that “[w]henever under this chapter an ancillary receiver is
20
jurisdiction, the Uniform Act authorizes a claimant in the ancillary state to present its
claim to the ancillary receiver as part of a statutory Claims Process being conducted in
the ancillary state.8 But even when this occurs and an ancillary proceeding takes place, it
is the respective insurance regulators that remain in charge of the process. Moreover, the
final allowance awarded to any claim pursued in the ancillary proceedings is conclusive
only “as to its amount” and “its priority, if any, against special deposits or other security
located within the ancillary state.”9 To recover against the general assets of the insolvent
insurer or any property other than special deposits or security located within the ancillary
state, the claimant must go through the Claims Process in the domiciliary state. See
Receiver’s Handbook, supra, at 17, 28.
to be appointed in delinquency proceedings for an insurer not domiciled in this State, the
court shall appoint the Commissioner as ancillary receiver”); id. § 5914(b) (providing
that in a case where the Commissioner or the court concludes that an ancillary receiver in
Delaware is not warranted, “[t]he domiciliary receiver for the purpose of liquidating an
insurer domiciled in a reciprocal state shall be vested by operation of law with the title to
all of the property, contracts and rights of action and all of the books and records of the
insurer located in this State” and shall have additional specified powers within the State
of Delaware).
8
See 18 Del. C. § 5915(b)(1); see also id. § 5916 (establishing a reciprocal
structure for Delaware residents when delinquency proceedings have been commenced in
another state against an insurer domiciled in that state and Delaware residents wish to
assert claims against that insurer).
9
Id. § 5915(b)(1). A special deposit claim is a type of secured claim where the
security takes the form of a deposit required by state law. “The regulatory statutes of
many states require that domestic and foreign insurers provide some security to the state
in the form of official bonds, securities, or other devices, to ensure the performance of
their obligations. These deposits may be considered to be a trust for policyholders.” 1
Couch on Insurance § 6:17.
21
Another feature of the Uniform Act enables the chief regulator in the domiciliary
jurisdiction to conserve the insolvent insurer‟s assets and avoid the expenditure of scarce
resources on claims that may not receive any distribution, regardless of their strength. To
ensure the fair and ratable treatment of claims, and to implement important regulatory
policies, the Uniform Act establishes a priority scheme for nine different classes of
claims against the general assets of the insolvent insurer.10 Distributions from the
insolvent insurer‟s assets are paid out to each class in order of priority and ratably within
each class. The nine classes are:
 Class I: The costs and expenses of administration expressly approved by the
receiver.
 Class II: The reasonable and necessary administrative expenses of the Delaware
Insurance Guaranty Association, the Delaware Life and Health Insurance
Guaranty Association, or any similar organization in another state.
 Class III: Claims by policyholders, beneficiaries, and insureds arising from
insurance policies written by the insolvent insurer and within coverage limits;
10
See 18 Del. C. § 5918. The Uniform Act recognizes two types of claims against
specific property of the insurer: special deposit claims and secured claims. The owner of
a special deposit claim is given priority against its special deposit in accordance with the
statutes governing the creation and maintenance of the special deposit. See id. § 5918(c).
If there is a deficiency, the owner of the special deposit claim “may share in the general
assets, but such sharing shall be deferred until general creditors and also claimants
against other special deposits who have received smaller percentages from their
respective special deposits have been paid percentages of their claims equal to the
percentage paid from the special deposit.” Id.
The owner of a secured claim is given a choice. The owner may either (i)
“surrender his or her security and file a claim as a general creditor” or (ii) “the claim may
be discharged by resort to the security, in which case the deficiency, if any, shall be
treated as a claim against the general assets of the insurer on the same basis as claims of
unsecured creditors.” Id. § 5918(d).
22
liability claims against the insolvent insurer‟s insureds that are within the scope of
coverage and not in excess of policy limits; and policyholder‟s claims for refunds
of unearned premium, but excluding (i) claims arising under reinsurance contracts,
including any claims for reinsurance premiums, and (ii) claims by insurers,
insurance pools, or underwriting associations for contribution, indemnity, or
subrogation, equitable or otherwise.
 Class IV: Taxes owed to the United States.
 Class V: Claims of the insolvent insurer‟s employees, other than its officers and
directors, for compensation actually owing for services rendered within the three
months before the delinquency proceeding and not exceeding $1000 per
employee.
 Class VI: Claims of general creditors, including claims of ceding and assuming
insurers and claims by insurers, insurance pools, or underwriting associations for
contribution, indemnity, or subrogation, equitable or otherwise.
 Class VII: Claims that otherwise would qualify for a higher priority class but
which were not timely filed.
 Class VIII: Surplus or contribution notes and similar obligations.
 Class IX: Claims of stockholders or other owners in that capacity.
See id. § 5918.
Under this priority scheme, general creditors are unlikely to recover from an
insolvent insurer. Moreover, the Uniform Act imposes an additional limitation on any
claim that remained contingent on the bar date. In the language of the Delaware statute,
No contingent and unliquidated claim shall share in a distribution of the
assets of an insurer which has been adjudicated to be insolvent by an order
made pursuant to this chapter, except that such claim shall be considered, if
properly presented, and may be allowed to share where:
(1) Such claim becomes absolute against the insurer on or before the
last day for filing claims against the assets of such insurer; or
23
(2) There is a surplus and the liquidation is thereafter conducted
upon the basis that such insurer is solvent.11
A general creditor whose claim remained contingent on the bar date therefore cannot
recover unless the insurer proves actually to have been solvent.
Taken together, the combination of (i) a centralized claims notice procedure, (ii)
the statutory prioritization scheme, and (iii) the initial evaluation of claims by the
Commissioner has an important implication for the efficient handling of a liquidation:
Depending on the extent of the insurer‟s insolvency, it may not be worthwhile to litigate
low priority claims. For example, if the insurer lacks sufficient assets to cover its
policyholders and any outstanding claims against them under Class III, then any general
creditors in Class VI will not receive any distribution, regardless of the strength of their
claims. Likewise, the holders of any claims that remained contingent on the bar date will
not recover anything at all, because under such a scenario, the insolvent insurer does not
have a surplus. By placing the Commissioner in charge of the liquidation and having the
court act on the Commissioner‟s recommendation, the Uniform Act limits the extent to
which resources might be wasted resolving claims that have no prospect of receiving a
distribution.
As these statutory provisions demonstrate, the Uniform Act sought to “centralize
the delinquency proceedings by vesting power in a single domiciliary receiver.”
11
Id. § 5928(a). A different rule applies to a contingent claim against a person
insured under a policy issued by the insolvent insurer. See id. § 5928(b). Because of the
nature of the Bank‟s claims, that subsection is not relevant here.
24
Receiver’s Handbook, supra, at 464. “The policy behind encouraging centralized
delinquency proceedings is to ensure that . . . the assets of the insurance company are
protected to assess liabilities, necessary for equitable distribution to all interested
parties.” Berg, supra, at 1382-83 (footnote omitted). “[K]eeping all actions confined to a
single forum . . . enables accurate assessment of existing liabilities, recognizing that the
receiver is in the best position to assess and account for all the assets and liabilities of the
insurance company for the sake of its creditors and policyholders.” Id.
B. The Role Of Injunctive Relief Under The Uniform Act
Injunctions are potent tools that courts use to enforce legal rights, prevent harm,
and preserve the status quo pending a final adjudication on the merits. As a court of
equity, this court has inherent authority to issue injunctive relief. See 43A C.J.S.
Injunctions § 2 (2016). The power extends to injunctions that bar parties from suing in
other forums. Id. § 103. Nevertheless, in the absence of a clear, mandatory, and
bargained-for forum selection clause, this court traditionally has proceeded with caution
when issuing anti-suit injunctions and has shown comity by striving to permit a sister
court to consider first whether to stay a competing proceeding.12
12
Compare Ingres Corp. v. CA, Inc., 8 A.3d 1143, 1146 (Del. 2010) (affirming
issuance of anti-suit injunction to enforce mandatory forum selection clause in bilateral
contract), with Household Int’l, Inc. v. Eljer Indus., Inc., 1995 WL 405741, at *1 (Del.
Ch. June 19, 1995) (Allen, C.) (issuing anti-suit injunction only after twice declining to
do so because of desire to show comity to courts of a sister state). See generally
Household Int’l, Inc. v. Eljer Indus., Inc., 1994 WL 469169, at *3 (Del. Ch. Aug. 12,
1994) (Allen, C.) (explaining that a court “that regularly issues [anti-suit injunctions] . . .
risks giving substantial offense to the judicial systems of other states, most often for no
reason”); RJR Nabisco, Inc. S’holders Litig., 576 A.2d 654, 662 (Del. Ch. 1990) (Allen,
25
Although the judicial power to enforce the legal obligations established by the
Uniform Act would exist independently, the Uniform Act takes the additional step of
granting the court overseeing the delinquency proceeding specific statutory authority to
enforce those obligations through injunctive relief, including, if necessary, injunctions
granted ex parte and without notice. The operative provision states:
Upon application by the Commissioner for such an order to show cause, or
at any time thereafter, the court may without notice issue an injunction
restraining the insurer, its officers, directors, stockholders, members,
subscribers, agents and all other persons from the transaction of its business
or the waste or disposition of its property until the further order of the
court.
18 Del. C. § 5904(a). See generally Cohen, 89 A.3d at 90.
The Uniform Act likewise takes the additional step of granting the court
overseeing the delinquency proceedings specific statutory authority to issue anti-suit
injunctions. That power too would exist independently, and its exercise would be
warranted in connection with the liquidation of an insurer under black letter principles of
law which recognize that an anti-suit injunction is appropriate “(1) to address a threat to
the court‟s jurisdiction; (2) to prevent evasion of important public policy; (3) to prevent a
multiplicity of suits; or (4) to protect a party from vexatious or harassing litigation.” 43A
C.J.S. Injunctions § 103 (2016). Nevertheless, the Uniform Act provides explicitly that
[t]he court may at any time during a proceeding under this chapter issue
such other injunctions or orders as may be deemed necessary to prevent . . .
the commencement or prosecution of any actions or the obtaining of
C.) (explaining role of comity for practice of issuing anti-suit injunctions and noting that
comity generally calls for permitting a sister court to rule on an application for a stay).
26
preferences, judgments, attachments or other liens or the making of any
levy against the insurer or against its assets or any part thereof.
18 Del. C. § 5904(b).
The plain language of Section 5904(b) makes the issuance of an anti-suit
injunction discretionary. Manhattan Re, 2011 WL 4553582, at *8. But the fact that the
drafters of the Uniform Act took pains to specify the existence of this authority, which
the domiciliary court otherwise would have, suggests to my mind that they viewed the
issuance of anti-suit injunctions as consistent with the public policies animating the
Uniform Act and wished to signal that a court should exercise that authority in a
delinquency proceeding more readily than it would in a different context. Because the
Uniform Act seeks to centralize the liquidation process in the domiciliary jurisdiction
under the control of the chief insurance regulator for that jurisdiction, the issuance of
anti-suit injunctions directly serves the core public policy goal of the statute. Anti-suit
injunctions issued under the Uniform Act, particularly as to proceedings in reciprocal
states, are thus categorically different from and should be treated differently than a
request for an anti-suit injunction in a plenary proceeding outside of the specialized,
regulatory context of an insurance company delinquency proceeding.
Perhaps unsurprisingly, anti-suit injunctions are routinely entered in delinquency
proceedings.13
13
Receiver’s Handbook, supra, at 15 (“It is important for the order of liquidation
to include certain other items . . . . These items typically include provisions for . . . [the]
enjoinment of other parties from proceeding with actions against the liquidator, the
insurer or policyholders.”); id. (explaining that liquidation order usually contains a
27
A liquidator of an insolvent insurer is likely to find that, at the outset of
insolvency proceedings, such insurer is defending a substantial number of
actions in a number of different forums. . . .
In almost all cases, it will be in the estate‟s interest to obtain a stay or
dismissal of such proceedings and to require such claims to be presented
and determined in the liquidation proceedings. . . . [T]his result preserves
the authority of the liquidation court and allows the liquidator and the court
to apply their expertise to the issues presented. The liquidation of claims in
the liquidation proceedings also avoids outside interference in the
liquidation proceedings and the possibility of conflicting rulings, piecemeal
litigation of claims and unequal treatment of claimants. Any such
consolidation of claims would also obviate the delay inefficiency and waste
of assets which would occur if the estate were required to defend claims in
any forum.
Gavin, supra, at 604; accord Lac D’Amiante, 864 F.2d at 1047 n.16 (quoting earlier
version of Gavin article).
It seems likely that the willingness of courts to issue anti-suit injunctions in part
reflects the substance of a mandatory provision appearing later in the Uniform Act, which
bars efforts by claimants to obtain attachments or other liens against the insolvent insurer
or its assets. In the language of the Delaware statute, that provision states that “[d]uring
the pendency of delinquency proceedings in this or any reciprocal state, no action or
proceeding in the nature of an attachment, garnishment or execution shall be commenced
or maintained in the courts of this State against the delinquent insurer or its assets.” 18
provision “[e]njoining lawsuits in other courts, whether in the same jurisdiction or
elsewhere”); Gavin, supra, at 609 (“At the outset of the liquidation proceedings, the
liquidation court typically issues an injunction which enjoins all persons from bringing or
further prosecuting any action against the insolvent insurer or its liquidator.”); see Berg,
supra, at 1379 (“Injunctions are the most common tool to ensure centralization of
proceedings and protection of all interested parties.”).
28
Del. C. § 5919. But the policies underlying the broad statutory authorization for anti-suit
injunctions in delinquency proceedings go further than simply a desire to stop extra-
jurisdictional collection efforts. The obvious purpose of the broader authority granted by
Section 5904(b) is to enable the court “to stay all pending proceedings and enjoin the
commencement of new proceedings against the insurance company to avoid interference
with the insurance company‟s assets.” Berg, supra, at 1379. “Like the Uniform Act, the
purpose of such injunctions is to prevent premature or inequitable distribution of the
insolvent insurer‟s assets and to prevent delay, disruption and the waste of assets which
would occur if the liquidator were required to defend actions in any court where they
were brought.” Gavin, supra, at 609-10.
As both the Delaware Supreme Court and this court have recognized, the means
by which lawsuits in other jurisdictions can interfere with an insolvency proceeding are
not limited to collection efforts. See Cohen, 89 A.3d at 81 n.73; Manhattan Re, 2011 WL
4553582, at *3; Checker Motors Corp. v. Exec. Life Ins. Co., 1992 WL 29806, at *3 (Del.
Ch. Feb. 13, 1992), aff’d, 615 A.2d 530 (Del. 1992). Forcing the Commissioner to defend
lawsuits in multiple jurisdictions dissipates the distressed insurer‟s assets by necessitating
expenditures of limited resources on foreign litigation. It also diverts the Commissioner‟s
attention from managing the insolvent insurer‟s affairs, marshaling its assets, and
overseeing the Claims Process. Particularly if the claims pursued in the foreign litigation
will have a low priority such that their owners will be unlikely to recover even if
successful, the practical result of the foreign litigation is to dissipate the insolvent
29
insurer‟s limited financial resources for no purpose. Rather than funding distributions to
higher priority claimants, those resources fund legal fees and other transaction costs.
Numerous other federal and state courts have recognized the importance of anti-
suit injunctions in limiting the extent to which claims against insolvent insurers can be
litigated outside of the delinquency proceeding.14 Using anti-suit injunctions to
consolidate proceedings in the domiciliary jurisdiction also “eliminates the risk of
conflicting rulings, piecemeal litigation of claims, and unequal treatment of claimants, all
of which are of particular interest to insurance companies and policy holders.” 15 Put
simply, “[f]or efficient rehabilitation or liquidation, the proceedings must be centralized
in a single forum for the purpose of orderly assessment of creditors‟ claims and effective
14
See Law Enf’t Ins. Co. v. Corcoran, 807 F.2d 38, 44 n.10 (2d Cir. 1986) (“[B]y
relegating claimants to a single proceeding centered in the state of domicile of the
insolvent insurer, we further the state policies of uniformity that have led well over half
of the states to join New York in adopting the [Uniform Act].”); Smith v. Farm & Home
Life Ins. Co., 506 S.E.2d 104, 107 (Ga. 1998) (“[A] central forum is necessary for the
orderly liquidation of an insolvent insurer‟s assets. Otherwise, creditors of an insolvent
insurance company will race to their respective state forums in an effort to be among the
first to levy against the insurer‟s assets located in that state, to the great detriment of
innocent policy holders who might be unaware that their interests are being usurped.”);
Bard v. Charles R. Myers Ins. Agency, Inc., 839 S.W.2d 791, 796-97 (Tex. 1992) (“In
authorizing a receivership court to enter an injunction barring suits from being brought or
maintained elsewhere, the Legislature recognized the benefit, if not the practical
necessity, of requiring that all claims against the insolvent insurer‟s estate be adjudicated
in the receivership proceedings to ensure the fair and consistent treatment of all claims.”).
15
Munich Am. Reins. Co. v. Crawford, 141 F.3d 585, 593 (5th Cir. 1998); see Lac
D’Amiante, 864 F.2d at 1046 (citing value of having state courts provide binding and
consistent interpretations of state law through insurance liquidation proceedings).
30
rehabilitation or equitable distribution to creditors upon liquidation.” Berg, supra, at
1378-79.
C. Factors To Be Considered When Deciding Whether To Lift An Anti-Suit
Injunction
Given the statutory structure of the Uniform Act, its fundamental goal of
centralizing delinquency proceedings under the control of the chief insurance regulator in
the domiciliary jurisdiction, and the role of anti-suit injunctions in serving that public
policy, a strong presumption exists that an existing anti-suit injunction should not be
lifted to permit a claimant to litigate against the insolvent insurer in a foreign jurisdiction.
That does not mean that it should never happen. As the Manhattan Re decision
recognized, there may be rare circumstances when the lifting of an anti-suit injunction
“would not be inconsistent with the statute or its goal[s].” 2011 WL 4553582, at *5.
As noted, there is a dearth of case law addressing when a court overseeing a
liquidation proceeding under the Uniform Act should lift an anti-suit injunction. In an
effort to draw guidance from a similar legal setting, this decision looks to rulings on
applications by general creditors to lift the automatic stay imposed by the Bankruptcy
Code. See generally 2 Michael Bacchus & Howard J. Steinberg, Bankruptcy Litigation §
12:66 (2015); Robert E. Ginsberg et al., Ginsberg & Martin on Bankruptcy § 3.05 (2016).
Under Section 362(a)(1) of the Bankruptcy Code, the filing of a bankruptcy
petition “operates as a stay, applicable to all entities, of . . . the commencement or
continuation . . . of a judicial, administrative or other action of proceeding against the
debtor.” 11 U.S.C. § 362(a)(1). “The purpose of the automatic stay is to „prevent certain
31
creditors from gaining preference for their claims against the debtor; to forestall the
depletion of the debtor‟s assets due to legal costs in defending proceedings against it;
and, in general, to avoid interference with the orderly liquidation or rehabilitation of the
debtor.‟” In re Scarborough-St. James Corp., 535 B.R. 60, 68 (Bankr. D. Del. 2015)
(quoting St. Croix Condo. Owners v. St. Croix Hotel, 682 F.2d 446, 448 (3d Cir. 1982)).
Those purposes parallel the reasons for issuing anti-suit injunctions under the Uniform
Act.16
Once the automatic stay has gone into effect, the bankruptcy court can lift it for
“cause.” 11 U.S.C. § 362(d)(1). The Bankruptcy Code does not define “cause,” nor does
it provide factors for the court to consider. Ginsberg, supra, § 3.05[B]. “Cause is an
intentionally broad and flexible concept, and is determined on a case-by-case basis.” Id. §
3.05[B][4]. Frequent applications to lift the automatic stay have generated a substantial
body of jurisprudence that addresses that discretionary decision. See In re Brown, 311
B.R. 409, 412 (E.D. Pa. 2004) (“[T]here are a multitude of reported decisions discussing
relief from the stay for „cause,‟ all of which are fact intensive and generally offer no
precise standards . . . .”).
16
See Manhattan, 2011 WL 4553582, at *3 (discussing the substantially similar
purposes of the two mechanisms); Checker Motors, 1992 WL 29806, at *3 n.2 (same);
accord Idaho Tr. Bank v. BancInsure, Inc., 2014 WL 4064063, at *6 (D. Idaho Aug. 15,
2014) (“The [Uniform Act] permits, and even anticipates, that all other proceedings in the
nature of claims against the company will be stayed, and resolved instead in the
liquidation process . . . . Such circumstances are, in fact, directly analogous to bankruptcy
cases . . . .”). See generally Berg, supra, at 1386 (observing that the anti-suit injunction
contemplated by the Uniform Act is “a right that aims at achieving the advantage
provided by the Federal Bankruptcy Code‟s automatic stay and exclusive jurisdiction
provisions”).
32
One common approach is for the court to weigh twelve factors first identified in In
re Curtis, 40 B.R. 795 (Bankr. D. Utah 1984), and known colloquially as the “Curtis
factors.” They are:
(1) Whether the relief will result in a partial or complete resolution of
the issues.
(2) The lack of any connection with or interference with the bankruptcy
case.
(3) Whether the foreign proceeding involves the debtor as a fiduciary.
(4) Whether a specialized tribunal has been established to hear the
particular cause of action and that tribunal has the expertise to hear
such cases.
(5) Whether the debtor‟s insurance carrier has assumed full financial
responsibility for defending the litigation.
(6) Whether the action essentially involves third parties, and the debtor
functions only as a bailee or conduit for the goods or proceeds in
question.
(7) Whether litigation in another forum would prejudice the interests of
other creditors, the creditors‟ committee and other interested parties.
(8) Whether the judgment claim arising from the foreign action is
subject to equitable subordination under Section 510(c).
(9) Whether movant‟s success in the foreign proceeding would result in
a judicial lien avoidable by the debtor under Section 522(f).
(10) The interest of judicial economy and the expeditious and economical
determination of litigation for the parties.
(11) Whether the foreign proceedings have progressed to the point where
the parties are prepared for trial.
(12) The impact of the stay on the parties and the “balance of hurt.”
Id. at 799-800 (internal citations omitted).
33
Many decisions have applied the Curtis factors or cited them with approval. See 2
Baccus & Steinberg, supra, § 12:66 (collecting cases). Not all bankruptcy courts follow
them. The Delaware bankruptcy courts, for example, apply a three-pronged balancing test
that asks:
(1) Whether any great prejudice to either the bankruptcy estate or the
debtor will result from the continuation of the civil suit;
(2) Whether the hardship to the non-bankruptcy party by maintenance of
the stay considerably outweighs the hardship to the debtor; and
(3) Whether the creditor has a probability of prevailing on the merits.
Scarborough-St. James, 535 B.R. at 68. Decisions applying this more general framework
nevertheless appear to take into account many of the same considerations identified by
the Curtis factors. See, e.g., In re SCO Gp., Inc., 395 B.R. 852, 857 (Bank. D. Del. 2007)
(incorporating Curtis factors as part of balancing process; drawing Curtis factors from In
re Sonnax Indus. Inc., 907 F.2d 1280 (2d Cir. 1990), which adopted them). See generally
Ginsberg, supra, § 3.05 (collecting cases).
Any potential doctrinal transplant must be approached with caution, and the
analogy to the automatic stay is not exact. One distinction that might be relevant in a
different case is that the automatic stay in bankruptcy is indeed automatic, while the
issuance of an anti-suit injunction under the Uniform Act is discretionary. As the
Commissioner correctly observes, the discretionary stay under the Uniform Act was
modeled on the Bankruptcy Act, which pre-dated the Bankruptcy Code and which did not
incorporate an automatic stay. The automatic stay arrived later, in 1973, “with the advent
34
of the Bankruptcy Rules of Procedure” that foreshadowed the Bankruptcy Code. Baum v.
Anderson, 541 F.2d 1166, 1169 (5th Cir. 1976).
The Commissioner contends that this difference cautions against relying too
heavily on precedent interpreting the automatic stay. One might posit that when a stay is
imposed automatically, there would be a greater risk that it would sweep too broadly. In
response, courts might be more willing to lift an automatic stay. The Bankruptcy Code in
fact provides as a general rule that if a party in interest requests relief from the automatic
stay, then the stay will terminate thirty days after the request “unless the court, after
notice and a hearing, orders such stay continued in effect.” 11 U.S.C. § 362(e)(1). By
contrast, when an anti-suit injunction is issued as a matter of discretion, one might expect
more tailored rulings, and courts therefore might be less willing to revisit their prior
decisions. While theoretically plausible, that distinction is not present here, where the
Anti-Suit Injunction was entered as a broad prophylactic measure analogous to the
automatic stay. The question now is whether to modify that prophylactic measure, not
whether to revisit a prior decision that granted a targeted anti-suit injunction. This case
therefore involves a scenario more closely paralleling an application for relief from the
automatic stay, and the bankruptcy courts‟ extensive experience with those applications
offers a source of insight.
But there is a more important consideration which in my view does apply to this
case, namely that a delinquency proceeding under the Uniform Act is a more specialized
type of proceeding than a bankruptcy under federal law and has a stronger regulatory
overlay. As the discussion of the Uniform Act demonstrates, an insurance liquidation
35
proceeding under state law represents the culmination of the regulation of its business by
the chief regulator of the domiciliary state, effectuated (to borrow a religious analogy
coined by Justice Jack B. Jacobs) through the regulator‟s administration of last rites to the
regulated entity. See Jack B. Jacobs, Delaware Receivers and Trustees: Unsung Ministers
of Corporate Last Rites, 7 Del. J. Corp. L. 251 (1982). Unlike a federal bankruptcy
proceeding, which is available to non-regulated biological and non-biological persons of
all stripes, a delinquency proceeding under the Uniform Act has purposes, substantive
standards, and procedural mechanisms that are tailored to the insurance context. It was
the greater specialization of state insurance liquidation proceedings that provided the
original, pre-McCarran-Ferguson Act policy rationale for excluding insurance company
liquidations from the scope of federal bankruptcy law:
The affairs of an embarrassed or insolvent insurance company often require
much technical skill and judgment and time for their adjustment and a
carrying forward of the business, to prevent lapses and to permit
reinsurance to simplify them. And considering the variety of insurance
obligations assumed and the various statuses thereof, a chief practical
difficulty is the ascertainment of who are really to be considered creditors
and in what amounts, often requiring much time and elaborate accounting
for its solution. Under such circumstances even the election of a trustee in
bankruptcy could be difficult, and a creditors‟ meeting could hardly
prosecute any business, owing to conflicting interests of the various classes
of claims.
In re Supreme Lodge of the Masons Annuity, 286 F. 180, 184-85 (N.D. Ga. 1923). Any
effort to gain insights form the bankruptcy arena must remain sensitive to those
differences. This decision therefore does not adopt any bankruptcy precedent wholesale,
but treats those precedents as informative.
36
D. The Allocation Of The Burden And The Factors That This Decision Will
Consider
In my view, as the party seeking to litigate against the insolvent insurer outside of
the delinquency proceeding, the Bank bears the burden of demonstrating that lifting the
Anti-Suit Injunction “would not be inconsistent with the [Uniform Act] or its goal[s].”
Manhattan Re, 2011 WL 4553582, at *5. Because of the strong policy of centralization
manifested in the Uniform Act, the burden of persuasion is a heavy one, with any doubts
resolved against permitting the party to litigate elsewhere. Placing the burden of
persuasion on the party seeking to lift the Anti-Suit Injunction comports with the general
approach taken to interpreting regulatory statutes in the insurance context:
The state has an important and vital interest in the liquidation of an
insolvent insurance company. The only restriction on the exercise of this
power is that the state‟s action shall be reasonably related to the public
interest and shall not be arbitrary or improperly discriminatory. Because the
insurance business is affected with a public interest, the law relating to
liquidation and dissolution of insolvent domestic companies is liberally
construed in favor of policyholders, creditors, and the public.
1 Couch on Insurance § 5:35 (footnotes omitted).
In considering whether to lift the Anti-Suit Injunction to enable the Bank to sue
Freestone in the South Carolina Action, this decision weighs the following factors:
(1) The nature and extent of any connection between the foreign
litigation and the domestic liquidation proceeding, including
a. Whether the foreign litigation involves the insolvent domestic
insurer holding property in a custodial or fiduciary capacity,
or as a bailee or conduit for the goods or proceeds in question,
or
b. Whether the insolvent domestic insurer itself has insurance
coverage that will cover the foreign litigation and whether the
37
carrier has assumed full financial responsibility for the
foreign litigation.
(2) The interests of judicial efficiency and litigant economy, including
a. Whether the foreign litigation can decide the issue more
efficiently and expeditiously than the domestic liquidation
proceeding;
b. Whether a specialized tribunal has been established to hear
the particular cause of action and that tribunal has the
expertise to hear such cases;
c. How far the foreign litigation has progressed, and
d. Whether the foreign litigation will completely resolve the
issue.
(3) Whether the foreign litigation would prejudice the interests of the
Commissioner, other claimants, or other interested parties, including
a. Whether the foreign litigation is likely to result in a judgment
that will give rise to a claim entitled to a recovery in the
domestic liquidation proceeding given its priority under the
Uniform Act;
b. The amount of the likely payment relative to the burden on
the insolvent domestic insurer, and
c. Whether the claim that would result from the foreign
judgment would be subject to equitable subordination or other
doctrines.
(4) The balance of hardships and whether the party wishing to proceed
with foreign litigation has shown that the hardship it would suffer
from not being able to proceed considerably outweighs the hardship
to the Commissioner and the insolvent domestic insurer.
As with other multi-factor tests, these factors are not intended to establish an exclusive or
exhaustive list of considerations.17 Additional factors may be relevant in future cases, and
17
Cf., e.g., Bell Helicopter Textron, Inc. v. Arteaga, 113 A.3d 1045, 1051-60 (Del.
38
the common law process may demonstrate that some of the enumerated factors prove
unhelpful and warrant little to no weight. The balancing is not a mathematical exercise.
1. The Nature And Extent Of Any Connection Between The
Foreign Litigation And The Domestic Liquidation Proceeding
The first factor that this decision applies is the nature and extent of any connection
between the foreign litigation and the domestic liquidation proceeding, together with the
risk that the foreign proceeding could interfere with the liquidation proceeding. This
factor draws by analogy on the second Curtis factor, which is “[t]he lack of any
connection with or interference with the bankruptcy case.” 40 B.R. at 800. As the Curtis
court noted, “[e]ven slight interference with the administration may be enough to
preclude relief in the absence of a commensurate benefit.” Id. at 806; see In re Penn-
Dixie Indus., Inc., 6 B.R. 832, 836 (Bankr. S.D.N.Y. 1980).
The closer the connection is between the foreign litigation and the domestic
liquidation proceeding, the greater the likelihood of interference. If the foreign litigation
relates to a core function of the receivership, such as marshaling assets or assessing
2015) (balancing non-exclusive list of factors to be considered when determining choice
of law under the Restatement (Second) of Conflict of Laws (1971)); Martinez v. E.I.
DuPont de Nemours & Co., 86 A.3d 1102, 1104-05 (Del. 2014) (identifying non-
exclusive list of factors to be considered when conducting forum non conveniens
analysis); Tumlinson v. Advanced Micro Devices, Inc., 81 A.3d 1264, 1269 (Del. 2013)
(identifying a “non-exhaustive list of factors” that a trial court may consider when
evaluating the reliability of expert testimony under Daubert v. Merrill-Dow
Pharmaceuticals, Inc., 509 U.S. 579 (1993)); In re Poliquin, 49 A.3d 1115, 1134 (Del.
2012) (identifying a “non-exhaustive lift of aggravating factors” that may be considered
when imposing attorney discipline); Sugarland Indus., Inc. v. Thomas, 420 A.2d 142, 150
(Del. 1980) (identifying non-exhaustive list of multiple factors to be considered when
awarding attorney‟s fees under common fund and common benefit doctrines).
39
claims, then this factor counsels against relief from an anti-suit injunction. Even the
prospect of forcing the Commissioner to expend time and resources litigating elsewhere
may be sufficient to cause this factor to weigh against relief, because a central purpose of
the Uniform Act is “to avoid dissipating a distressed insurer‟s assets by allowing it to be
sued, and requiring it to defend, litigations scattered in many jurisdictions throughout the
country.”18
By contrast, a situation where this factor could support relief from an anti-suit
injunction might involve a suit against the insolvent insurer that did not actually seek to
18
Manhattan Re, 2011 WL 4553582, at *3 (quoting Checker Motors, 1992 WL
29806, at *3); accord Cohen 89 A.3d at 81 n.73; see Munich Am., 141 F.3d at 593
(ordering federal court to abstain from hearing claim in deference to insurance
proceeding; observing that “[i]n addition to the interests served by orderly adjudication of
claims . . . , consolidation presents the unnecessary and wasteful dissipation of the
insolvent company‟s funds that would occur if the receiver had to defend unconnected
suits in different forms across the country”); Lac D’Amiante, 864 F.2d at 1046 (directing
federal court to abstain from hearing insurance issue; describing role of insurance
regulator as liquidator and explaining that “independent proceedings against an insurer
placed into insolvency are highly disruptive to the state‟s regulatory scheme”).
The weight given to the risk that foreign litigation will dissipate the insurer‟s
resources and divert the attention of the regulator marks one area where the public
policies underlying the Uniform Act suggest a different answer than the Bankruptcy
Code. Under the former regime, these costs are a significant concern. Under the latter,
they are frequently discounted. See, e.g., In re Santa Clara Cty. Fair Ass’n, 180 B.R. 564,
566 (B.A.P. 9th Cir. 1995) (“Ordinarily, litigation costs to a bankruptcy estate do not
compel a court to deny stay relief.”); In re Burger Boys, Inc., 183 B.R. 682, 688
(S.D.N.Y. 1994) (“Courts have held, however, that the increased costs of litigating in a
particular forum are not so prejudicial as to require continuance of a stay.”); In re Roger,
539 B.R. 837, 848 (C.D. Cal. 2015) (reversing denial of stay relief in part because “the
record does not contain any documentary evidence concerning projections regarding the
comparative attorneys‟ fees and expenses that would be amassed by litigating in the
different fora”).
40
establish a claim against the insurer, but which instead sought to secure property or assets
that the insurer was holding in a custodial or fiduciary capacity. This example draws by
analogy on the third Curtis factor, which envisions a situation where the debtor is merely
holding property as a fiduciary,19 and the sixth Curtis factor, which identifies an action
19
The actual language of the third Curtis factor is “[w]hether the foreign
proceeding involves the debtor as a fiduciary.” Curtis, 40 B.R. at 800. This court
frequently hears litigation involving claims for breach of fiduciary duty, which are often
highly complex and heavily litigated proceedings. At first blush, the third Curtis factor
seems to envision deferring to a foreign court to oversee this type of litigation. Closer
examination of the Curtis decision and the case that it cited in support of this factor, In re
Bailey, 11 B.R. 199, 201 (Bankr. E.D. Va. 1981), reveals that both relied on the
legislative history of Section 362, which mentioned fiduciary status as part of a broader
discussion of instances in which the debtor did not hold the property in its own name but
rather for others:
The lack of adequate protection of an interest in property of the party
requesting relief from the stay is one cause for relief, but is not the only
cause. . . . Other causes might include the lack of any connection with or
interference with the pending bankruptcy case. For example, a divorce or
child custody proceeding involving the debtor may bear no relation to the
bankruptcy case. In that case, it should not be stayed. A probate proceeding
in which the debtor is the executor or administrator of another‟s estate
usually will not be related to the bankruptcy case, and should not be stayed.
Generally, proceedings in which the debtor is a fiduciary, or involving
postpetition activities of the debtor, need not be stayed because they bear
no relationship to the purpose of the automatic stay, which is debtor
protection from his creditors. The facts of each request will determine
whether relief is appropriate under the circumstances.
H.R. Rep. No. 95–595, 95th Cong., 1st Sess. 343-44 (1977), quoted in Curtis, 40 B.R. at
799. The reference to the “debtor as a fiduciary” is thus not a reference to a claim against
the debtor for breach of fiduciary duty, but rather to a situation where the debtor has
nominal legal title but not equitable title. By contrast, a claim for breach of fiduciary
duty, if proven, generates a judgment against the debtor, and hence such a claim does
involve the “purpose of the automatic stay, which is debtor protection from his creditors.”
Id.; see Pink v. Title Guar. & Tr. Co., 8 N.E.2d 321, 324-25 (N.Y. 1937) (requiring
parties asserting counterclaims for breach of fiduciary duty to pursue them through
41
that “essentially involves third parties” in which “the debtor functions only as a bailee or
conduit for the goods or proceeds in question.” 40 B.R. at 800. In these scenarios, the
foreign litigation should not require meaningful expenditures of resources by the receiver,
nor would the foreign litigation result in a judgment against the insurer.
Other situations that could lead to this factor supporting relief from the anti-suit
injunction would include cases where the insolvent insurer is not itself at risk, such as
where the insurer itself had insurance coverage that will cover the foreign litigation and
the carrier has agreed to assume full financial responsibility for the foreign litigation.
This example draws by analogy on the fifth Curtis factor, which envisions a situation
where “the debtor‟s insurance carrier has assumed full financial responsibility for
defending the litigation.”20
In this case, the claims that the Bank wishes to assert in the South Carolina Action
relate directly to the insurance liquidation proceeding. The Bank has filed claims notices
as part of the Claims Process, thereby recognizing that if its claims are not litigated in the
claims process in insurance company liquidation proceeding).
20
40 B.R. at 800; see Webster v. Superior Court, 758 P.2d 596, 597 (Cal. 1988)
(holding that claimant injured in shooting rampage in offices of insolvent insurer should
have been permitted to pursue personal injury claim outside of liquidation process where
insurer had liability insurance that would cover any claim plus the expenses of defending
it and where claimants stipulated that they would not seek any recovery from the
insolvent insurer‟s assets). See generally Ginsberg, supra, § 3.05[B][4][a] (“Where the
debtor is a defendant in an action where any judgment will be covered by insurance (most
commonly a personal injury suit), the plaintiff should be granted relief to pursue the
action. This is because the claim, if proved valid at trial, will be satisfied, not from
property of the estate or from property of the debtor, but by the insurance company.”).
42
South Carolina Action, they will be handled as part of the insurance liquidation
proceeding. Requiring the Commissioner to defend the South Carolina Action will force
the Commissioner to divert a portion of Freestone‟s limited resources to litigation
defense, thereby dissipating Freestone‟s assets. The Commissioner also will be forced to
devote attention to the South Carolina Action, diverting the Commissioner from her core
tasks of managing Freestone‟s business, marshaling its assets, and overseeing the Claims
Process. This is not a case in which the Bank seeks to obtain property that Freestone was
merely holding in a custodial or fiduciary capacity, nor is there an alternative source of
funds that would cover the Commissioner‟s legal expenses or any judgment, such as
insurance proceeds. This factor weighs heavily against lifting the Anti-Suit Injunction.
2. The Interests Of Judicial Efficiency And Litigant Economy
The second factor this decision considers incorporates the interests of judicial
efficiency and litigant economy. As long as considerations of fundamental fairness and
due process are satisfied, the legal system has an obvious interest in resolving disputes in
an expeditious and economical manner, both for the parties involved and for the legal
system as a whole. This factor adheres closely to the tenth Curtis factor, which calls for
considering “[t]he interest of judicial economy and the expeditious and economical
determination of litigation for the parties.” 40 B.R. at 800.
Pertinent considerations under this heading include whether the foreign litigation
will proceed in a specialized tribunal that has been established to hear the particular cause
of action, how far the foreign litigation has progressed, and whether the foreign litigation
will completely resolve the claims and avoid any need for them to be addressed in the
43
insurance proceeding. These considerations draw on the first, fourth, and eleventh Curtis
factors, which are
(1) Whether the relief will result in a partial or complete resolution of
the issues[;]
....
(4) Whether a specialized tribunal has been established to hear the
particular cause of action and that tribunal has the expertise to hear
such cases[;]
. . . . [and]
(11) Whether the foreign proceedings have progressed to the point where
the parties are prepared for trial.
Id. at 799, 800.
When applied to a delinquency proceeding under the Uniform Act, this factor and
its subsidiary considerations reinforce the presumption against lifting the Anti-Suit
Injunction that is manifested by placing the burden of persuasion on the party seeking to
litigate elsewhere. The Uniform Act already seeks to achieve the goals of judicial
efficiency and litigant economy by centralizing the liquidation process in a single
jurisdiction. Moreover, the statutory liquidation proceeding is itself a specialized
proceeding, overseen by the domiciliary court, in which the chief insurance regulator of
the domiciliary state takes charge of the insurer‟s affairs, marshals its assets, and
manages the Claims Process. The Claims Process itself serves as an additional form of
specialized proceeding that permits classes of claims against an insolvent insurer to be
resolved expeditiously, particularly when those categories of claims will not be entitled to
any distribution under the statutory priority scheme. See 1 Couch on Insurance § 6:7
44
(describing claims resolution process); Francine L. Semaya & William K. Broudy, A
Primer on Insurance Receiverships, 40 The Brief 22, 29-30 (2010) (same). Numerous
courts have recognized the value of the specialization of the state-law insurance
liquidation process and the expertise of the state insurance regulators in carrying it out.21
In this case, there are no countervailing factors that would favor permitting the
Bank to litigate against Freestone in the South Carolina Action. The South Carolina Court
21
See, e.g., Lac D’Amiante, 864 F.2d at 1045 (deferring to state insurance
liquidation proceeding in light of role of states as “preeminent regulators of insurance in
the federal system” and the structure of the state-law regulatory system); Grimes v.
Crown Life Ins. Co., 857 F.2d 699, 705 (10th Cir. 1988) (deferring to state insurance
delinquency proceeding in light of the state‟s “complex and comprehensive scheme of
insurance regulation which contains the [Uniform Act] for the liquidation of an insolvent
insurer”); Law Enf’t Ins. Co. v. Corcoran, 807 F.2d 38, 44 (2d Cir. 1986) (deferring to
state insurance liquidation proceeding given “the state‟s strong interest in centralizing
claims against an insolvent insurer into a single forum where they can be efficiently and
consistently disposed of”); Levy v. Lewis, 635 F.2d 960, 963 (2d Cir. 1980) (“The
Superintendent of Insurance is an experienced state official who has been involved both
in rehabilitating and liquidating [the insolvent insurer]. Liquidation in particular is an
area in which the Superintendent‟s expertise is critical. Liquidation proceedings involve
the adjustment of thousands of claims against the insurer by policyholders and those who
claim under them, as well as claims by present employees, past employees, and general
creditors. Moreover, the claims must be satisfied by marshalling the existing assets of the
insolvent company and by reinsuring existing policies using a state fund established for
this purpose.”); Blackhawk Heating & Plumbing Co. v. Geeslin, 530 F.2d 154, 159-60
(7th Cir. 1976) (explaining that the “[t]he interests of [a domestic insurance company and
its] owners policyholders, and creditors, as well as the public, are best served and
protected by an orderly and efficient process of liquidation” in state court); Motlow v. S.
Hldg. & Sec. Corp., 95 F.2d 721, 724, 725-26 (8th Cir. 1938) (describing New York
system for insolvency proceedings involving domestic insurers as “comprehensive,
economical, and efficient”; rejecting attempt by creditor to assert claim belonging to
insolvent insurer in federal court, outside of liquidation proceedings; explaining that
“other courts, except when called upon by the court of primary jurisdiction for assistance,
are excluded from participation [in liquidation proceedings” and that “[t]his should be
particularly true as to proceedings for the liquidation of insolvent insurance companies”),
cert. denied, 305 U.S. 609 (1938).
45
is certainly a distinguished and qualified court, and there is no question that it can
capably address any claims that the Bank wishes to bring against Freestone. But the
South Carolina Action is a plenary proceeding, not a specialized proceeding, and the
South Carolina Court is not a specialized tribunal.
This is also not a situation where the South Carolina Action is on the verge of trial
such that it might make sense to defer to the outcome of that litigation. The South
Carolina Action remains at an early stage. The South Carolina Court has denied the
Bank‟s motion to dismiss Companion‟s claims, but that is all. The Bank‟s claims against
Freestone have yet to be asserted. Nor would the outcome of the South Carolina Action
resolve completely the issues surrounding the Bank‟s claims against Freestone. The most
that can be said is that if this court lifts the Anti-Suit Injunction, then any decision by the
South Carolina Court would be binding on the Commissioner and this court for purposes
of establishing Freestone‟s liability and the facial amount of its claim. That is true
generally under principles of collateral estoppel, see Pyott v. La. Mun. Police Emps.’ Ret.
Sys., 74 A.3d 612, 616 (Del. 2013), and by analogy to how the Uniform Act handles
secured claims and claims against statutory deposits held by non-residents who elect to
proceed in ancillary proceedings rather than in the domiciliary proceeding.22 The decision
22
See 18 Del. C. §§ 5915 & 5916. As discussed previously, when delinquency
proceedings have been commenced in one state against an insurer domiciled in that state,
and when the scope of the insurer‟s operations warrants the insurance regulator in another
state commencing ancillary proceedings in that state that result in the insurance regulator
in the sister state serving as an ancillary receiver, then residents of the ancillary state can
present a claim to the ancillary receiver. The final allowance as determined in the
ancillary proceedings is “conclusive as to its amount” and “shall also be accepted as
46
would not be binding for purposes of determining the priority of the resulting claim or the
amount of any distribution from Freestone that the Bank might receive. The Bank
recognizes this point by accepting that it could not execute on any judgment that it might
obtain through the South Carolina Action but would have to return to this court and
participate in the liquidation process.
The Bank has suggested that this court should defer to the South Carolina Action
because the Trust Agreement contains a forum selection provision that identifies the
South Carolina Court as a permissible forum where Freestone can be sued. The forum
selection provision is only mandatory for claims that Freestone might assert; it is
permissive as to claims brought by the Bank or Companion. As among the parties to the
Trust Agreement, therefore, the provision does not require that the Bank sue in the South
Carolina Court. Regardless, in my view, even a mandatory forum selection provision
would not automatically bind the Commissioner when exercising the State of Delaware‟s
regulatory and police powers under the Uniform Act. It is true, generally speaking, that
the Commissioner stands in the shoes of the insolvent entity when it acts as receiver, but
that general principle has limitations, and it does not allow private parties to trump the
statutory provisions and public policies of the domiciliary state, such as the public policy
of centralizing proceedings in the domiciliary jurisdiction and the statutory provisions
conclusive as to its priority, if any, against special deposits or other security located
within this State.” Id. § 5916(b)(2). The concept of ancillary proceedings as used by the
Uniform Act does not encompass any plenary lawsuit that a creditor chooses to file in
another state, or any counterclaim or third-party claim that the creditor chooses to assert
in pending litigation in another state.
47
that implement that policy. The Manhattan Re decision reached the same conclusion
implicitly when it determined that it had discretion to determine whether the parties in
that case would have their dispute heard in arbitration, notwithstanding that the
arbitration provision would have been mandatory if the Commissioner had not taken over
as receiver for the insurer in the context of a receivership proceeding. 2011 WL 4553582,
at *7. That does not mean that a mandatory forum selection provision would not be taken
into account, only that it is not itself dispositive. Because the forum selection provision in
this case was not mandatory, this decision need not dilate further on the issue.
Under the circumstances, the second factor does not favor lifting the Anti-Suit
Injunction. The Claims Process, not the South Carolina Action, provides the more
specialized, efficient, and cost-effective method of completely addressing the Bank‟s
claims against Freestone.
3. Prejudice To The Interests Of The Commissioner, Other
Claimants, And Other Interested Parties
The third factor that this decision considers is whether permitting a claimant to
proceed with the foreign litigation would prejudice the interests of the Commissioner,
other claimants, and other interested parties. This factor draws on the seventh Curtis
factor, which is “[w]hether litigation in another forum would prejudice the interests of
other creditors, the creditors‟ committee and other interested parties.” 40 B.R. at 800.
Pertinent considerations under this heading include (i) whether the foreign
litigation is likely to result in a judgment that would be entitled to a distribution in the
liquidation proceeding, (ii) the amount of the likely payment relative to the burden on the
48
insolvent domestic insurer, and (iii) whether the claim that would result from the foreign
judgment would be subject to equitable subordination or other doctrines. These
considerations draw on the eighth and ninth Curtis factors, which take into account the
priority of the eventual claim in the bankruptcy proceeding and the claimant‟s ability to
recover. The eighth factor does so by considering “[w]hether the judgment claim arising
from the foreign action is subject to equitable subordination under Section 510(c).”23 The
ninth factor does so by considering “[w]hether movant‟s success in the foreign
proceeding would result in a judicial lien avoidable by the debtor under Section 522(f).”24
23
40 B.R. at 800. Section 510(c) of the Bankruptcy Code “adopts the long-
standing judicially developed doctrine of equitable subordination under which a
bankruptcy court has power to subordinate claims against the debtor‟s estate to claims it
finds ethically superior under the circumstances.” Allied E. States Maint. Corp. v. Miller
(In re Lemco Gypsum, Inc.), 911 F.2d 1553, 1556 (11th Cir. 1990). Section 510(c)
provides:
(c) Notwithstanding subsections (a) and (b) of this section, after notice and
a hearing, the court may--
(1) under principles of equitable subordination, subordinate for
purposes of distribution all or part of an allowed claim to all or part
of another allowed claim or all or part of an allowed interest to all or
part of another allowed interest; or
(2) order that any lien securing such a subordinated claim be
transferred to the estate.
11 U.S.C § 510(c). A subordinated claimant may recover little or nothing at all. It would
make little sense to expend litigant and judicial resources to pursue, dispute, or adjudicate
the claim, and therefore the prospect that a claim will be subordinated counsels against
lifting the stay. See, e.g., In re CLC of Am., Inc., 68 B.R. 512, 515 (Bankr. E.D. Mo.
1986) (declining to provide stay relief where claim would be subordinated to the claims
of general creditors and would recover, if at all, only with equity holders).
24
40 B.R. at 800. In a bankruptcy proceeding, the debtor‟s assets become property
49
In the context of an insurer‟s insolvency proceeding under the Uniform Act,
obtaining a judgment against the insurer in foreign litigation does not automatically lead
to recovery. The claim still must be assigned a priority by the Commissioner, subject to
the approval of the Commissioner‟s recommendation by the Court of Chancery. See 18
Del. C. § 5918. As previously discussed, Class III encompasses claims by “policyholders,
beneficiaries, and insureds.” Class VI encompasses claims by general creditors. In
addition, claims by general creditors that remained contingent as of the bar date are not
entitled to any recovery, absent a surplus. Id. § 5928(a). Under this priority scheme,
general creditors in an insurance liquidation frequently do not receive any distributions.
The prioritization scheme matters because if a claim is not likely to receive any
distribution, it makes little sense to permit the claimant to pursue the claim in another
jurisdiction and force the Commissioner to devote a portion of the insolvent insurer‟s
scarce resources to defending the claim.
of the bankruptcy estate, subject to the debtor‟s right to reclaim certain property as
exempt. Schwab v. Reilly, 560 U.S. 770, 774 (2010). Section 522 of the Bankruptcy Code
specifies the types of property that is eligible for exemption. Section 522(f) provides that
the debtor may avoid the fixing of a lien on an interest of the debtor in
property to the extent that such lien impairs an exemption to which the
debtor would have been entitled under subsection (b) of this section, if such
lien is . . . a judicial lien, other than [a lien involving domestic support
obligations] . . . .
11 U.S.C. § 522(f)(1)(A). If the litigation for which stay relief is sought would result in a
lien on exempt property, and if the debtor could avoid the lien by invoking the
exemption, then “no purpose is served in granting relief from the automatic stay” to allow
the litigation to proceed. Builders & Remodelers, Inc. v. Hanson, 20 B.R. 440, 442
(Bankr. D. Minn. 1982).
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If the Bank were successful in the South Carolina Action, it would hold a Class VI
claim. Moreover, because the Bank‟s claim remained contingent as of the bar date, the
Bank only would be able to receive a distribution if “[t]here is a surplus and the
liquidation is thereafter conducted upon the basis that such insurer is solvent.” Id. That is
highly unlikely. Lifting the Anti-Suit Injunction would force the Commissioner to re-
purpose scarce resources that otherwise could fund distributions to policyholders and
other higher priority claimants and use them to pay for litigation counsel in the South
Carolina Action, with the odds-on outcome being that even if the Bank prevailed, it
would recover nothing. The third factor therefore weighs heavily in favor of denying the
Bank‟s motion.
4. The Balance Of Hardships
The fourth factor that this decision considers is the balance of hardships. This
factor draws on the twelfth Curtis factor, which considers “[t]he impact of the stay on the
parties and the „balance of hurt.‟” 40 B.R. at 800. The analysis of the preceding factors
foreshadows the outcome of this one.
From the Commissioner‟s perspective, being forced to participate in the South
Carolina Action yields no benefits, only costs. The South Carolina Action is a plenary,
non-specialized proceeding that will not resolve the Bank‟s claims more efficiently than
the Claims Process. Meanwhile, the Commissioner will be distracted from its statutorily
identified tasks of managing Freestone‟s operations, marshaling its assets, and evaluating
and making recommendations regarding claims. The Commissioner also will have to
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devote resources to the South Carolina Action that otherwise could be used to pay in-the-
money claims.
From the Bank‟s perspective, bringing Freestone into the South Carolina Action
yields at best intangible benefits. The Bank‟s prospects of an eventual monetary recovery
from Freestone are not heightened; they remain non-existent unless Freestone turns out to
have a surplus. The best the Bank can do is contend that without Freestone in the South
Carolina Action, the South Carolina Court will not be able to allocate a share of liability
to Freestone, which could increase the Bank‟s relative share of liability. But that
argument does not withstand scrutiny. To the extent that the Bank can be held jointly and
severally liable in the South Carolina Action, as appears to be the case if Companion
prevails, then Companion can recover 100% of its losses from the Bank. Whether
Freestone is a party to the South Carolina Action does not affect that prospect; it is a
function of the doctrine of joint and several liability. If Freestone were solvent, the Bank
might be able to shift some of that liability to Freestone through indemnification or
contribution, and Freestone‟s degree of responsibility might affect the contribution
analysis, but Freestone‟s insolvency renders that prospect trivial. Even if Freestone were
allocated 100% of the liability, the Bank would not be able to recover anything from
Freestone (unless Freestone proves to be solvent), and therefore Freestone‟s share of the
loss will continue to lie with the Bank.
The Bank also argues that whether or not Freestone is in the case may affect the
degree to which liability is allocated among the Bank, Southport, and Burns. As the Bank
sees it, Freestone‟s absence might result in the Bank bearing a greater share of liability.
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That argument, however, cuts both ways, as the Bank can use the empty chair defense in
an effort to shift blame to Freestone. Moreover, because Freestone is insolvent, the Bank,
Southport, and Burns really will be arguing about how to allocate liability among
themselves. The doctrine of joint and several liability makes them each potentially liable
for the full extent of Companion‟s damages, regardless of what percentage of
responsibility might be allotted to Freestone. The effect of Freestone‟s insolvency is to
remove Freestone from the risk-sharing picture, not to alter the risk-sharing profile as
among the Bank, Southport, and Burns. The Bank therefore will not suffer any
incremental prejudice from not being able to name Freestone as a third-party defendant.
The prejudice the Bank has suffered results from Freestone being insolvent, not the Anti-
Suit Injunction. The balancing of hardships thus favors keeping the Anti-Suit Injunction
in place.
E. The Different Outcome In Manhattan Re
The Bank argues that Manhattan Re requires a different outcome. Although the
Manhattan Re decision did not conduct a factor-based analysis, it provides an example of
a situation when the factors considered by this decision would support lifting an anti-suit
injunction to permit a focused action to proceed in a specialized forum.
The Manhattan Re decision arose out of a delinquency proceeding involving
Manhattan Re-Insurance Company (“Manhattan Re”), an insolvent, Delaware-domiciled
insurer. The Commissioner had filed the delinquency proceedings in 2007. Four years
later, in 2011, the Commissioner had proposed a plain of rehabilitation. American
Motorists Insurance Company (“AMICO”) was the only objector to the plan.
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AMICO was the successor in interest to counterparties under various reinsurance
agreements that Manhattan Re entered into during the 1970s. Through the agreements,
Manhattan Re had ceded certain risks to AMICO under policies that Manhattan Re wrote.
To secure its payment obligations, AMICO posted a letter of credit for Manhattan Re‟s
benefit. Manhattan Re was entitled to draw the full amount of the letter of credit if
AMICO failed to maintain the letter of credit or otherwise provide substitute security.
In 2003, AMICO notified Manhattan Re that it would not be able to renew the
letter of credit. Manhattan Re drew down the full balance of the letter of credit in the
amount of $7,392,000 and held the funds in a segregated account to secure AMICO‟s
payment obligations under the reinsurance agreements. The decision called these
amounts the “AMICO Fund.” Once Manhattan Re entered liquidation, the Commissioner
contended that the AMICO Fund belonged to Manhattan Re and constituted a general
asset of the estate. The Commissioner‟s proposed plan of rehabilitation treated the
amounts in the AMICO Fund as unrestricted assets to be used to satisfy Manhattan Re‟s
general obligations to policyholders and creditors, as well as any administrative fees and
expenses incurred by the Commissioner.
AMICO objected, contending that the amounts in the AMICO Fund were
restricted cash collateral that only could be used to pay AMICO‟s obligations as a
reinsurer of Manhattan Re. The underlying reinsurance contracts contained arbitration
clauses, and AMICO asked the court to refer the dispute over the proper characterization
of the AMICO Fund to arbitration.
54
The Commissioner opposed having the dispute arbitrated. First, the Commissioner
argued that an arbitration clause in a pre-petition agreement is not binding on the chief
insurance regulator in the domiciliary state when performing its regulatory functions in a
delinquency proceeding under the Uniform Act. After considering various authorities, the
Manhattan Re decision held that it had discretion to order that the dispute be resolved by
arbitration. 2011 WL 4553582 at *7. That aspect of Manhattan Re is not implicated here.
Second, the Commissioner contended that even if the court could order arbitration,
there was an existing anti-suit injunction, entered in 2007, that barred the arbitration
proceeding from going forward. As this decision has noted on several occasions, the
court in Manhattan Re held that it had the discretion to lift its injunction if doing so
“would not interfere with the operation of the [Uniform] Act and would further the
interest of an orderly resolution of the rehabilitation of Manhattan Re.” Id. at *8.
On the facts presented, the court in Manhattan Re lifted the anti-suit injunction.
Although the Manhattan Re decision did not conduct a multi-factor analysis, its
reasoning suggests that the court evaluated key considerations that this case has
identified. The different result in Manhattan Re stems from the reality that the factual
record pointed in the opposite direction.
Most prominently, the Manhattan Re court took into account considerations
analogous to the third factor evaluated by this decision, namely whether permitting a
claimant to proceed with the foreign litigation would prejudice the interests of the
Commissioner, other claimants, and other interested parties. The Manhattan Re court
noted the advanced state of the rehabilitation proceeding and the reality that having the
55
status of the AMICO Fund determined by arbitration would not harm any of Manhattan
Re‟s policy holders:
There apparently are only eight remaining policy claims against the assets
of Manhattan Re, and all of those claims will be covered by either AMICO
or the AMICO Fund. Therefore, there is no question that the remaining
policyholders will be protected, regardless of whether the dispute over the
AMICO Fund is resolved through arbitration or litigation in this Court.
Id. Unlike in this case, permitting the arbitration to proceed did not present any risk that
funds would be diverted from higher priority claimants and conflict with the core
purposes of the Uniform Act.
Relatedly, the Manhattan Re decision recognized in substance that having the
status of the AMICO Fund decided through arbitration would not prejudice the
Commissioner. Unlike the Bank‟s claims in this case, the status of the AMICO Fund did
not actually involve a claim against the estate. The question was whether and to what
degree the AMICO Fund was an asset of the estate. AMICO‟s objection therefore was
logically prior to the claims analysis and would have to be decided in any event, either by
the court or someone else. There also was little difference between the two forums
because the question predominantly was one of law under the governing agreements. As
the Manhattan Re court observed, “there is no reasonable basis on which to believe that
either party would suffer material prejudice by having an arbitral panel, rather than this
Court, decide their dispute regarding the nature of the AMICO Fund.” Id.
The Manhattan Re decision likewise appears to have considered the interests of
judicial efficiency and litigant economy. As discussed above, pertinent considerations
under this heading include whether the foreign litigation will proceed in a specialized
56
tribunal that has been established to hear the particular cause of action and whether the
foreign litigation will completely resolve the claims. The Manhattan Re court noted that
the arbitration provisions in the reinsurance agreements called for disputes to be resolved
“before three disinterested executives from the insurance industry.” Id. The arbitration
provisions thus contemplated a sophisticated tribunal with expertise in the specific issue
being presented, giving that forum a comparative advantage even when compared to a
delinquency proceeding under the Uniform Act. Moreover, the outcome of the
proceeding before the arbitration panel would decide completely the status of the AMICO
Fund without any need for further analysis by the court.
The Bank‟s situation is materially different. The Bank wishes to assert fact-laden
and legally complex claims in the South Carolina Action, and the nature of the litigation
will diverge substantially from this court‟s streamlined evaluation of a recommendation
by the Commissioner as to the treatment of a claim that remained contingent on the bar
date and thus will not recover anything unless Freestone proves to have a surplus. The
South Carolina Court is indisputably competent to decide any issue presented to it, but it
is not a specialized tribunal, and it lacks the types of comparative advantages over a
delinquency proceeding that the arbitration panel possessed in Manhattan Re. Equally
important, the South Carolina Action cannot fully resolve the issues presented. Even if
the Bank proceeded to trial in the South Carolina Action and obtained a decision from the
South Carolina Court, that ruling would not end matters. The Bank would have to return
to this court and participate in the Claims Process. There is also the likelihood that if the
Anti-Suit Injunction is not lifted, no one ever will need to determine whether and to what
57
extent Freestone is liable to the Bank. Unlike in Manhattan Re, therefore, lifting the Anti-
Suit Injunction in this case threatens to divert scarce resources from higher priority
claimants, interfere with the activities of the Commissioner, and prejudice the
administration of the receivership.
In light of the differences between the facts in Manhattan Re and the facts in this
case, it should not come as a surprise that the two decisions reach different results. The
Manhattan Re case involved a different type of dispute, a different type of alternative
proceeding, and different implications for the delinquency proceeding before the court.
III. CONCLUSION
On the facts presented, lifting the Anti-Suit Injunction to permit the Bank to
litigate against Freestone in the South Carolina Action would be contrary to the
philosophy, structure, and purpose of the Uniform Act. The Bank‟s motion for relief from
the Anti-Suit Injunction is denied.
58