Source: https://www.mmmlaw.com/media/applying-automatic-stays-in-insurance-liquidations/
Timestamp: 2019-04-25 10:56:22+00:00

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For policyholders, creditors and others connected with an insurer, news that the company is being liquidated can come as a surprise, to say the least. Therefore, it is important for all parties involved to understand how the insurance liquidation process works.
In many ways, an insurance liquidation is similar to a Chapter 7 bankruptcy under federal law. The similarities include the “automatic stay” that goes into effect when a person or company files bankruptcy. When an entity files for bankruptcy protection, 11 U.S.C. § 362 “freezes” the assets and liabilities of the bankrupt entity; accordingly, creditors cannot move forward with collection, and the debtor cannot dispose of any property potentially subject to collection. As part of the process, any “judicial, administrative, or other action or proceeding against the debtor” is stayed until the assets and liabilities of the debtor can be determined. 11 U.S.C. § 362(a)(1). Without the stay, creditors might “race to the courthouse” to press their claims before an entity’s assets are exhausted. This could lead to inconsistent adjudications, res judicata issues and the denial of worthy claims. The automatic stay gives the bankruptcy court time to determine the merits of the claims against the bankrupt estate and make an orderly, efficient and equitable distribution of its assets.
Things work similarly in insurance liquidations, with one major difference: the law of the state in which the insurer is domiciled governs the liquidation. Accordingly, when an insurer is insolvent, it is the domiciliary state’s regulatory authority which will petition for an order of liquidation, and a court in that state which will issue the automatic stay. Ensuring this stay order is given proper effect is one of the key responsibilities of the liquidator.
In the state-based insurance regulatory world, logic suggests reciprocity ought to make the stay effective in non-domiciliary states. If states do not respect out-of-state court orders concerning insurers, the regulation of insurance is hampered greatly. In the liquidation context, a stay that applied only to one state allows creditors to race to the courthouses of other states, undercutting the purpose of the stay order.
By its own terms, a stay order issued by a state court applies everywhere. Washington D.C. law, for example, stipulates that “no action at law or equity or in arbitration shall be brought against the insurer or liquidator, whether in the District or elsewhere.” D.C. Code § 31-1322(a)(emphasis added). This language is from the Insurance Rehabilitation Model Act (IRMA) drafted by the National Association of Insurance Commissioners (NAIC), and is typical of state statutes on insurance liquidations. While it may sound simple, getting an automatic stay order recognized in “foreign” states can be difficult. State courts often are unfamiliar with the insurance liquidation process or hesitant to enforce the stay, to say nothing of aggrieved plaintiffs. How then, can a liquidator ensure the stay order is respected? The liquidator has several sources of authority to prevent this from happening.
First, many states have codified the reciprocity principle and provided a mechanism by which it can be enforced. Some courts may apply the stay automatically, and other courts may force the liquidator or the liquidator’s representative to seek a local stay order. Familiarity with the laws of the states in question is essential. For example, in New Jersey, the liquidation may rely upon N.J. Stat. 17B:32-53, which specifies that “[t]he courts of this State shall give full faith and credit to injunctions against the [foreign] liquidator or the insurer.” Absent a compelling argument that the provision somehow does not apply to the case at hand, a foreign court will respect the statute and give effect to an out-of-state court’s automatic stay.
If there is no such statute, the liquidation may turn to the U.S. Constitution. The issue of reciprocity is not unique to the insurance context but instead is inherent in a federal system. The drafters of the Constitution anticipated such difficulties and provided a solution in the Full Faith and Credit Clause of Article IV, Section 1 of the U.S. Constitution. The Full Faith and Credit Clause mandates that the judgment of a court in one state “qualifies for recognition throughout the land.” Baker v. General Motors Corp., 522 U.S. 222 (1998)(affirming the general principle that a judgment of a competent state court on an issue over which it has adjudicatory power must be given effect in other states). In the insurance liquidation context, courts have applied this principle in Beecher v. Lewis Press Co., 238 A.D.2d 927 (App. Div. N.Y. 1997)(holding that non-enforcement of a Rhode Island court ordered stay “would violate the purpose of the injunction, which is to preserve and protect the assets of [the insurer in liquidation] for an equitable distribution amongst its claimants and assured.”) and inBryant v. Shields, Britton & Fraser, 930 S.W.2d 836 (Ct. App. TX 1996)(holding that “because the liquidation order is a final, enforceable order in Tennessee, Texas courts must afford it full faith and credit.”). Simply alerting an out-of-state court or counsel of these holdings may be enough.
In states without such precedent, claimants may try to proceed despite the stay. In these cases, the liquidator must seek an appropriate— and perhaps creative—solution. For instance, in some cases an appeal to a claimant’s practical side may convince the claimant that the liquidation’s claims process is more likely to yield fruit. The correct approach for each situation is as unique as its individual circumstances.

References: § 362
 § 362
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