Case Title: In the Matter of the Liquidation of Midland Insurance Company / American Standard Inc. v. Swiss Reinsurance America Corporation

Citation: 

Docket Number: 

State: new-york

Court: New York Appellate Court

Date: 2011-04-05T00:00:00Z

Document:
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This opinion is uncorrected and subject to revision before
publication in the New York Reports.
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No. 38  
In the Matter of the Liquidation 
of Midland Insurance Company.
--------------------------------
American Standard Inc., et al.,
            Appellants,
Echlin, Inc., et al.,
            Claimants,
        v.
Swiss Reinsurance America 
Corporation, et al.,
        Intervenors-Respondents,
Superintendent of Insurance of 
the State of New York, &c.,
et al.,
            Respondents.
David J. Strasser, for appellants.
David Axinn, for respondents. 
Barry R. Ostrager, for intervenor-respondents.
CIPARICK, J.:
In this choice-of-law dispute between policyholders and
the New York State Liquidation Bureau, the question presented is
whether the insurance policies issued by Midland Insurance
Company (Midland) must be interpreted under New York substantive
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No. 38
law because Midland has been adjudged insolvent and placed into
liquidation in New York.  We conclude that New York law need not 
apply and hold that for each Midland policy in dispute an
individual choice-of-law analysis must be conducted to determine
which jurisdiction's law should govern.
I.
Headquartered in lower Manhattan, Midland was
incorporated under New York Law in October 1959 as a stock
casualty insurer.  Its charter authorized Midland to conduct
business throughout the United States and in Canada.  Midland
carried multiline insurance, a type of insurance that typically
bundles together different exposures to risks.  During its
existence, Midland transacted with Fortune 500 companies
nationwide, underwriting a substantial amount of excess coverage
policies.  
In 1985, the New York State Insurance Department (the
Insurance Department) commenced an investigation into Midland's
financial condition.  The Insurance Department's analysis of
Midland's financial condition revealed that the company's
liabilities exceeded its assets.  On March 7, 1986, the Insurance
Department warned Midland that it would seek an order placing
Midland into receivership if Midland was unable to get its
financial affairs in order.  Midland could not comply with the
Insurance Department's directives and, by a unanimous vote of its
Board of Directors, consented to liquidation.
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By order dated April 3, 1986 (the Liquidation Order),
Supreme Court adjudged Midland insolvent and placed it into
liquidation pursuant to Article 74 of the New York Insurance Law. 
As of this date, Midland's financial records showed that its
assets totaled approximately $307 million while its liabilities
totaled approximately $354 million, making it insolvent by about
$47 million.  The Liquidation Order authorized the Superintendent
of the Insurance Department (the Liquidator) to take possession
of Midland's property and to sell or otherwise dispose of it at
the best obtainable price. 
Following the entry of the Liquidation Order in Supreme
Court, the Liquidator began the statutorily mandated process of
notifying all persons with potential claims against Midland.  To
that end, the Liquidator mailed out over 38,000 proof of claim
forms to known Midland policyholders, and other creditors.  In
addition to providing Midland's policyholders and creditors with
notice of Midland's insolvency, the Liquidator informed them of
their obligation to present their claims by filing the requisite
proof of claim forms with the Insurance Department no later than
April 3, 1987.1
Article 74 of the Insurance Law vests the Liquidator
with the authority to review these submitted claims and make
1 The Liquidator was unable to identify every Midland
creditor prior to the filing deadline.  Creditors who returned
their proof of claim forms after the filing deadline, but within
four months of the Liquidator's mailing were deemed to have
timely filed.   
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recommendations to Supreme Court on what claims should be allowed
or disallowed.  Claims approved by Supreme Court are entitled to
a share in Midland's estate while disallowed claims are not.  By
order dated March 15, 1994, Supreme Court established the
procedure for the disallowance of claims.  The order provided
that the Liquidator must send a "Notice of Recommendation of
Disallowance" (NOD) to those policyholders whose claims have been
recommended for disallowance.  The order also permitted anyone
who received a NOD to file a written objection with the
Liquidator within 60 days of the posted NOD date.  Objections to
the NOD timely received would be referred to a Supreme Court
appointed referee who would review and conduct hearings on the
disputed claims.    
Claimants in this appeal (Major Policyholders) are
among the corporate policyholders, headquartered in various
states, who have timely submitted proof of claims to the
Liquidator.  The Major Policyholders have asserted claims against
Midland for coverage stemming from exposure to, among other
things, asbestos, environmental pollution, product liability, and
other toxic torts.  They seek to recover a significant percentage
of the billions of dollars at stake in this liquidation
proceeding.  Subsequent to the Major Policyholder's submission of
their proof of claims against Midland, the Liquidator determined
that some of their claims should be disallowed.  Accordingly, the
Liquidator furnished the Major Policyholders with NODs in
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compliance with the court-ordered procedure, and, in turn, the
Major Policyholders filed timely objections. 
In 2006, the Liquidator, the Major Policyholders, and
Midland's reinsurers approached Supreme Court to address their
disagreement concerning the Liquidator's decision to disallow
certain of the Major Policyholder's claims.  One of the disputes
between the parties centered on the Liquidator's decision to
exclusively apply substantive New York law in making its
determination to disallow certain claims of the Major
Policyholders.  The Liquidator predicated its decision to apply
New York law on the Appellate Division's decision in Matter of
Midland Ins. Co. [Claim of Lac d'Amiante du Quebec, Ltee] (269
AD2d 50 [1st Dept 2000]) (Midland LAQ).  The Major Policyholders
disputed the precedential value of the holding in Midland LAQ and
argued that, under New York law, the Liquidator cannot
legitimately disallow claims without first engaging in a choice-
of-law analysis to determine the substantive state law that
applies to each policy.  
As a result, the parties requested that Supreme Court
resolve this issue.  Consequently, during the spring of 2006, the
parties negotiated and agreed upon a proposed case management
order.  Supreme Court so-ordered the document, entitled
"Stipulation and Case Management Order" (CMO) on July 31, 2006. 
The CMO set forth a procedure to resolve the legal disputes
between the parties, dividing the legal issues into two phases. 
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The legal issue posed by phase I of the CMO, which is the subject
of this appeal, is "whether New York substantive law governs the
interpretation and application of Midland insurance polices at
issue in this litigation or whether [Supreme Court] must conduct
an analysis utilizing New York's choice-of-law test to determine
which jurisdiction's or jurisdictions' law(s) apply."
After reviewing memoranda of law submitted by the
parties, Supreme Court agreed with the Major Policyholders that
the Liquidator erred in automatically applying New York
substantive law to every claim submitted.  The court held that
Certain Underwriters at Lloyd's, London v Foster Wheeler Corp.
(36 AD3d 17 [1st Dept 2006], affd for reasons stated below 9 NY3d
928 [2007]) obligated the Liquidator to conduct a threshold
analysis of each Midland policy to determine the applicable
substantive state law according to the "grouping of contacts"
approach of the Restatement (Second) of Conflict of Laws.  The
court observed:
"On this motion, it cannot be determined whether
analysis of the policyholders' denied claims
under the Restatement's 'grouping of contacts'
approach would have resulted in allowances of
their claims.  It may be possible for the 
Liquidator to defend his denial of the 
[Major Policyholders'] claims even when 
applying the Restatement's approach.  This 
must be determined on a claim-by-claim basis."
The Appellate Division reversed the order of Supreme
Court (Matter of Midland Ins. Co., 71 AD3d 221 [1st Dept 2010]). 
The court concluded that its prior decision in Midland LAQ, which
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stood for the proposition that "New York law must apply to all
claims in a liquidation proceeding," was the law of the case and
binding on Supreme Court (id. at 226).  The court distinguished
Foster Wheeler from its holding in Midland LAQ noting that Foster
Wheeler "involved contract claims against a solvent insurer"
(id.).  The court reasoned that New York law must apply to the
claims in a liquidation proceeding because New York has a
"paramount state interest" in ensuring that the Liquidator makes 
"distributions from an insolvent's insurer's estate" in an
equitable manner (id.).  To interpret "Midland's policies under
the laws of more than one state," the court held, "would run
afoul" of Insurance Law § 7434 (a), which proscribes the creation
of "subclasses among the policyholders-creditors" (id. at 227).
On April 29, 2010, the same panel of the Appellate
Division granted the Major Policyholders leave to appeal to this
Court and certified a question inquiring whether its order, which
reversed the order of Supreme Court, was "properly made."  We now
reverse and answer the certified question in the negative.
II.
It is well-settled that New York has long recognized
"the use of 'center of gravity' or 'grouping of contacts' as the
appropriate analytical approach to choice-of-law questions in
contract cases" (Zurich Ins. Co. v Shearson Lehman Hutton, 84
NY2d 309, 317 [1994]; see also Auten v Auten, 308 NY 155, 160-161
[1954]).  "The purpose of grouping of contacts is to establish
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No. 38
which State has 'the most significant relationship to the
transaction and the parties'" (Zurich, 84 NY2d at 317, quoting
Restatement [Second] of Conflict of Laws § 188 [1]).  In Auten,
we held that the "grouping of contacts" theory to choice-of-law
disputes "gives [] the place having the most interest in the
problem paramount control over the legal issues arising out of a
particular factual context, thus allowing the forum to apply the
policy of the jurisdiction most intimately concerned with the
outcome of the particular litigation" (308 NY at 161 [internal
quotation marks, brackets and citation omitted]).  In the context
of liability insurance contracts, the jurisdiction with the most
"significant relationship to the transaction and the parties"
will generally be the jurisdiction "which the parties understood
was to be the principal location of the insured risk  . . .
unless with respect to the particular issue, some other
[jurisdiction] has a more significant relationship" (Zurich, 84
NY2d at 318, quoting Restatement [Second] of Conflict of Laws §
193).
We recently affirmed the Appellate Division's
application of these principles in Foster Wheeler.  In that case,
Foster Wheeler Corporation sought a declaratory judgment for an
apportionment of the defense and indemnity costs associated with
various asbestos-related personal injury claims from its insurers
(Foster Wheeler, 36 AD3d at 19).  "[T]he insurance policies in
question cover[ed] risks that [were] spread through multiple 
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No. 38
states" (id. at 22) and the parties disputed whether New York or
New Jersey law should apply when interpreting those policies (see
id. at 21).  
In applying New York's "grouping of contacts" approach
to choice-of-law questions, the Appellate Division concluded
"where it is necessary to determine the law governing a liability
insurance policy covering risks in multiple states, the state of
the insured's domicile should be regarded as a proxy for the
principal location of the insured risk" (id. at 24; see also
Steadfast Ins. Co. v Sentinel Real Estate Corp., 283 AD2d 44, 50
[3d Dept 2001] [where insurance policy at issue covered risks
stemming from "the nationwide scope of (the insured's)
operations, the principal location of the insured risk should be
deemed to be the state where (the insured) is incorporated and
has its principal place of business"]).  The Appellate Division
observed that this approach promotes "certainty, predictability
and uniformity of result" (Restatement [Second] of Conflict of
Laws § 6 [2] [f]) in that "[t]he state of the insured's domicile
is a fact known to the parties at the time of contracting, and
(in the absence of a contractual choice-of-law provision)
application of the law of that state is most likely to conform to
their expectations" (Foster Wheeler, 36 AD3d at 23).
The Liquidator and the reinsurers do not quarrel with
the holding in Foster Wheeler, but argue that the choice-of-law
principles pronounced there are inapplicable to this case since
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Midland is in liquidation, having been adjudged insolvent in New
York.  They contend that Article 74 of the Insurance Law
abrogates the "grouping of contacts" approach to choice-of-law
questions and requires the Liquidator to uniformly evaluate the
claims submitted by the Major Policyholders under New York law. 
We find no statutory support for their position.
Our analysis of Article 74 of the Insurance Law begins
with section 7432 (b), which provides:
"Where a liquidation, rehabilitation or conservation
order has been entered in a proceeding against an 
insurer under this article, all persons who may have
claims against such insurer shall present the same to 
the liquidator"
(emphasis added).  Here, the claims of the Major Policyholders
derive from the insurance policies issued by Midland prior to its
insolvency.  There can be no doubt that, if solvent, Midland and
the Major Policyholders would have engaged in a "grouping of
contacts" analysis to determine which jurisdiction's laws govern
the claims submitted.  We see no reason why the Liquidator and
the Major Policyholders should be precluded from engaging in the
same choice-of-law analysis simply because Midland has been
adjudged insolvent in New York.
Indeed, we find further support for our conclusion that
choice-of-law principles continue to apply once an insurer has
been adjudged insolvent in Insurance Law § 7433 (a).  That
statute, which governs the proof and allowance of claims
submitted by an insured, states, in part:
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"A proof of claim shall consist of a written statement
. . . setting forth the claim, the consideration 
therefor, any securities held thereof, any payments
made thereon, and that the sum is justly owing from the
insurer to the claimant"
(emphasis added).  We interpret "justly owing" to mean the amount
Midland would have been obligated to pay its Major Policyholder
had it remained solvent.  Thus, determining the "sum" of a claim
"justly owing from the insurer" invariably requires a choice-of-
law analysis because the methodology of calculating an insured's
loss can differ from one jurisdiction to the next (see e.g.
Foster Wheeler, 36 AD3d at 20-21 [New Jersey's "mathematical
method of effecting a pro rata allocation of an insured loss over
the period of its occurrence . . . would make tens of millions of
dollars more coverage available" to the insured than New York's
method]).  
Furthermore, there is nothing in the provisions of
section 7433 (a) setting forth what claims "may be allowed" that
substantive New York law must apply in computing their value. 
Accordingly, we hold that a blanket application of New York law
to Midland's policies would frustrate the statutory mandate
requiring the submission and allowance of claims by the
Liquidator "justly owed" to the Major Policyholders.
Moreover, we reject the argument that an individual
choice-of-law analysis on each of Midland's policies would create
"subclasses" among the Major Policyholders in violation of
Insurance Law § 7434 (a) (1).  Section 7434 (a) (1) merely
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governs the distribution of assets in a liquidation proceeding,
not the allowed sum, and its reference to "subclasses" has no
bearing on whether choice-of-law principles should apply to the
valuation of the Major Policyholders' claims.  The statute, in
relevant part, provides:
"distribution payments shall be made in a manner that 
will assure the proper recognition of priorities and a
reasonable balance between the expeditious completion
of the liquidation and the protection of unliquidated
and undetermined claims.  The priority of distribution
of claims . . . shall be in accordance with the order 
in which each class of claims is set forth in this 
paragraph . . . Every claim in each class shall be paid
in full or adequate funds retained for such payment
before the members of the next class receive any
payment.  No subclasses shall be established within any
class"
(emphasis added).2  The purpose in including language proscribing
the creation of "subclasses" is to ensure that members within a
particular class are not given priority vis-a-vis one another in
terms of distribution.  This proscription becomes particularly
important where there are insufficient funds to pay 100% of the
allowed claims within a particular class as there is here.  In
that situation, by eliminating the establishment of "subclasses,"
the statute requires that the liquidator pay each member of the
same class a pro-rata share of the remaining assets from the
liquidated estate (see Matter of Columbia Ribbon Co., 117 F2d
999, 1002 [3d Cir 1941] [In the context of a federal bankruptcy
2 Insurance Law § 7434 designates nine classes of claimants
for asset distribution purposes.  The parties do not dispute that
the Major Policyholders are in "class two." 
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proceeding, "[i]t does not hold that [a] court may set up a sub-
classification of claims within a class given equal priority by
the Bankruptcy Act."]). 
Thus, the proscription against formulating "subclasses"
in the distribution phase of a liquidation does not require that
the Liquidator apply substantive New York law to all the claims
submitted by the Major Policyholders.  Rather, we conclude that
Article 74 of the Insurance Law recognizes that the allowance of
claims and the distribution of the liquidated assets are two
separate functions.  While the statute is explicit in defining
which classes of claimants receive priority for distribution
purposes (see Insurance Law § 7434 [a] [1] [i-ix]), it does not
address choice-of-law at the valuation stage.  If the Legislature
intended for substantive New York law to apply to every claim
submitted by policyholders at the allowance phase, it would have
said so.
On this point, we note that the claims submitted by the
Major Policyholders are rooted in common law principles of
contract.  It is axiomatic that "rules of the common law are to
be no further abrogated than the clear import of the language
used in the statute" (Transit Commn. v Long Is. R.R. Co., 253 NY
345, 255 [1930]; see McKinney's Statutes § 301 [a], [b]).  Here,
since there is no provision in Article 74 of the Insurance Law
that suggests otherwise, we conclude that the Major Policyholders
are entitled to an evaluation of their claims by the Liquidator
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No. 38
under the same common law choice-of-law principles that clearly
applied to their claims prior to Midland's insolvency.  
Notably, we are not the only Court to arrive at this
determination.  In Viacom, Inc. v Transit Cas. Co. (138 SW3d 723
[Mo 2004]), the Missouri Supreme Court rejected a similar
argument that Missouri law should govern all insurance policies
issued by an insolvent Missouri insurer, regardless of which
state's law would have applied to those policies prior to its
insolvency (138 SW3d at 726).  Rather, the court held that the
insurer's insolvency did not change its coverage obligations,
which continued to be governed by the law of the state that the
parties knew was controlling at the time of contracting (see
id.).  Moreover, the Missouri Supreme Court observed that its
insurer insolvency laws did not address choice- of-law and
therefore Missouri's pre-insolvency choice-of-law principles
continued to govern the insurance policies at issue.  "Where the
insolvency code is silent, courts apply the common law" (id.; see
generally McKinney's Statutes § 301 [a], [b]).
Finally, even
if we were to accept respondents' argument that, under stare
decisis and law of the case principles, the Appellate Division's
holding in Midland LAQ was binding on Supreme Court as it arose
out of the same liquidation proceeding, the ruling of a lower
court, of course, is "not binding upon this [C]ourt" (Roger v
McCloskey, 305 NY 75, 78 [1953]).  To the extent that Midland LAQ
stands for the proposition that New York substantive law must
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apply to all claims in the Midland liquidation, that holding, for
the reasons stated herein, is no longer good authority.  
Accordingly, the order of the Appellate Division should
be reversed, with costs, the order of Supreme Court reinstated,
and the certified question answered in the negative. 
*   *   *   *   *   *   *   *   *   *   *   *   *   *   *   *   *
Order reversed, with costs, order of Supreme Court, New York
County, reinstated and certified question answered in the
negative. Opinion by Judge Ciparick. Chief Judge Lippman and
Judges Graffeo, Read, Smith, Pigott and Jones concur. 
Decided April 5, 2011
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