Opinion ID: 2054217
Heading Depth: 2
Heading Rank: 2

Heading: Priority as Between Smith and the Delaware Receiver: CUIC's Argument Under Huffines v. American Sec. & Trust Co.

Text: CUIC contends that District of Columbia law gives an insurance company receiver an absolute priority over a lien asserted in the District, even when the lien was created before the receiver was appointed. [26] CUIC argues, in the alternative, that if the law of the District of Columbia does not give insurance company receiverships priority over pending liens, this court as a matter of policy should afford such priority to insurer receiverships by giving effect to the principles incorporated in Delaware's version of the Uniform Insurer Liquidation Act (UILA). See supra note 24. [27] Specifically, this would mean (among other things) that, upon the commencement of a so-called delinquency proceeding against a troubled insurer requiring appointment of a receiver, any action to attach, garnishee, or execute upon the debtor's property would be stayed automatically pending further order of the court, and that any lien obtained within four months of the commencement of the proceeding would be held void. DEL.CODE ANN. tit. 18, § 5919 (1989). Smith argues, to the contrary, that under District of Columbia law, a judgment creditor who has attached the debtor's assets in a bank, or has recorded a judgment lien against the debtor's real property, has priority over the claims of a subsequently appointed receiver for the debtor. Smith also disagrees with CUIC's alternative contention that we should give effect to Delaware's version of the UILA. Smith stresses that the District of Columbia, having adopted neither the UILA nor even the UILA'S reciprocality provisions, must be said to have rejected UILA principles. CUIC and Smith point to different case law to support their respective arguments. CUIC contends that Huffines, 63 App.D.C. at 224, 71 F.2d at 345, is controlling here. In that case, Huffines brought suit against American Security & Trust Co. to set aside a sale of property on the ground that Huffines, who held a second deed of trust on the property, had not received adequate notice of the sale. Before the sale, the National Benefit Life Insurance Company, an insurance company in receivership, owned the property subject to two deeds of trust; American Security held the first deed of trust while Huffines held the second. The notes secured by American Security's first deed of trust had been overdue and unpaid, and American Security had therefore petitioned for the court's permission, in the insurance company's receivership proceeding, to sell the property to satisfy the notes. The court granted American Security's request, and the sale proceeded at public auction. Huffines subsequently argued on appeal that the sale should be set aside because, as holder of the second deed of trust, he had received inadequate notice of the sale. The United States Court of Appeals for the District of Columbia Circuit concluded, first, that Huffines' notice would not have been adequate if the property had been sold at a judicial sale, but that his notice would have been adequate, under the terms of his deed of trust, if the sale essentially had been private, in execution of American Security's deed of trust. The court then concluded that the sale had been of the latter type, made by the trustee under the authority and according to the terms of the deed of trust, Huffines, 63 App.D.C. at 227, 71 F.2d at 348, and that the notice Huffines had received, therefore, had been adequate. The court further stated that American Security had petitioned the court for permission to conduct the sale only because National Benefit Life Insurance Co., the owner of the property, was in receivership. See id. The court then added that, even though the receiver had taken charge of the property, American Security's petition had not made the sale a judicial sale. See id. The court elaborated: This conclusion is not inconsistent with the action of the trust company and trustee under the first deed of trust in applying to the court in the receivership case for leave to proceed with a sale of the property. It was provided by the terms of the decree entered by the lower court in that case, as well as by the established principles of the law, that, after the court had taken possession through its receiver of the property of the defendant in the case, it was not permissible for a creditor holding a lien upon any of the impounded property to begin or carry on proceedings for the sale thereof for the payment of his debt. Only by permission of court could such a sale be made. In this instance the creditor and the trustee who otherwise would have made sale of the property under the authority of the deed of trust without the intervention of the court, were compelled to apply to the court wherein the receivership case was pending for leave to make sale of the property for the purpose of paying the indebtedness secured by the deed of trust. The application for such permission was made by the trustee to the court and was granted. Whereupon the trustee was free to make sale of the property under and according to the terms of the deed of trust and this he did. This action did not convert the sale into a judicial or court sale. The sale was not made by the court, nor by officers acting under its orders. No application was made to the court for an order confirming the sale when made. No proceedings were had such as would be necessary were the sale a judicial sale (section 95 and § 521 et seq. D.C.Code 1924 [D.C.Code 1929, T. 25, § 206, and § 191 et seq.]; Rules of the Supreme Court of the District of Columbia, Equity Rules 68 et seq.). The entire proceeding was had under and according to the deed of trust alone. Moreover, it was unnecessary that Huffines should be made a party in the receivership case. No relief was sought against him in that case. The only result secured by the action of the trust company and the trustee in the receivership case was simply an order permitting them to proceed under the deed of trust free from the control of the court. This permitted of a sale as if no receivership proceeding had been had and no receiver appointed. Id. Relying on this language, CUIC argues that under District of Columbia law, if a judgment creditor has attached, or recorded a judgment lien against, the property of an insurance company in receivership, the creditor cannot take the property without permission of the court wherein the receivership case was pending, id., even if the attachment or lien had been created before the insolvency order was issued. CUIC then argues that, by virtue of such authority, CUIC's Delaware receiver was entitled to claim priority over Smith's postjudgment liens, even though they predated the receivership. According to CUIC, therefore, the trial court should not have granted Smith's motions for judgment of recovery and for summary judgment, respectively allowing Smith to execute on CUIC's assets in the bank and voiding CUIC's sale of its Connecticut Avenue building to CUG and authorizing Smith to execute upon it. Before turning to Smith's counterargument, it is important for us to note that CUIC merges  and thus confusestwo issues. It is one thing to say that a judgment lien creditor may not dispose of the debtor's property until a receivership court grants permission; it is quite another thing to say that the receiver has a paramount claim to the property even though the creditor obtained a judgment lien before the receiver was appointed. Under Huffines, the fact that the receivership court had authority to withhold permission for a secured creditor to sell the mortgaged property apparently amounted to no more than authority to grant a temporary stay of the exercise of the creditor's rights, in order to give the debtor some breathing room in dealing with all the creditors; it did not mean, in addition, that the receiver could seize the property for the insolvent's estate over the claim of a prior secured creditor. Indeed, the Huffines opinion made clear that the receivership court was ultimately obliged to grant permission for the sale under the deed of trust free from the control of the court[,] ... as if no receivership proceeding had been had and no receiver appointed. Id. In other words, whatever legal basis there may have been for requiring receivership court permission for the sale, [28] Huffines established that the receivership court itself must recognize the right of the creditor to execute upon the security interest by way of a private sale. This means, in effect, that under District of Columbia law, a court supervising an insurance company receivership ultimately must enforce the substantive rights of judgment lien creditors whose liens attached before appointment of the receiver.