Opinion ID: 3064802
Heading Depth: 3
Heading Rank: 2

Heading: Pertinent Transactions and Events

Text: The relationship of the parties, and the nature of the transactions summarized below, are complex and perhaps unique to the insurance and reinsurance industry. Reduced to their central elements, however, they can be summarized as follows: Debtor SNIG guaranteed the performance of its affili- 2 Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1330, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9036, as enacted and promulgated prior to the effective date of The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. 109-8, 119 Stat. 23 (Apr. 20, 2005). IN THE MATTER OF SNTL 7443 ates’ obligations to Centre. Following default on these obligations, the parties reached an agreement whereby the affiliates paid Centre $163.4 million to satisfy an obligation of $180 million and Centre simultaneously released the guarantor (SNIG). Thereafter, in settlement of a preference action brought by the liquidator of the affiliate insurance companies, Centre returned a portion of the $163.4 million payment. Centre now seeks to recover the returned amount ($110 million) from the guarantor SNIG; Trustee asserts that SNIG’s released liability cannot be revived. More specifically, on December 18, 1998, SNIG sold its affiliate Business Insurance Company (“BICO”) to Centre Solutions Holdings (Delaware Limited) (“Centre Solutions”); BICO became known as Centre. On the same day, Centre entered into certain reinsurance agreements (the “LPT and Quota Share Agreements”) with insurance companies affiliated with SNIG: California Compensation Insurance Company (“CalComp”) and Superior National Insurance Company (“SNIC”). SNIG guaranteed performance of one of these reinsurance agreements known as the “QSR Contract.” In addition, the parties also entered into fronting (service) agreements known as the Underwriting Management Agreement (“UMA”) and the Claims Administration Services Agreement (“CSA”). SNIG also guaranteed performance of these agreements. The UMA, CSA, LPT and Quota Share Agreements are collectively referred to as the “Fronting Agreements.”3 The Fronting Agreements provide for the recovery of all reasonable expenses, including attorney’s fees, incurred in the enforcement of SNIG’s guaranty. 3 The Fronting Agreements provide for the recovery of all reasonable expenses, including attorneys’ fees, incurred in the enforcement of SNIG’s guaranty. Under the Fronting Agreements, SNIG sold insurance policies using Centre’s name and “A” financial rating. SNIG marketed, underwrote and administered the policies, and received the premiums and paid the claims arising under them. Centre received a fee for the use of its name and financial rating. 7444 IN THE MATTER OF SNTL The Fronting Agreements were breached in late 1999. On December 31, 1999, Centre entered into a Partial Commutation and Settlement Agreement (“PCSA”) with CalComp, SNIC and SNIG. The PCSA modified the Fronting Agreements and provided for a partial release of the reinsurance obligations of SNIG, CalComp, SNIC and all of their parents and affiliates (among others) up to $180 million (the “Release”).4 In exchange for the Release, SNIG, CalComp and SNIC agreed to meet six conditions, including payment of a $163.4 million Partial Commutation Payment (“Payment”) by CalComp and SNIC. Centre received the Payment; no evidence was introduced that any of the six conditions for the Release were unsatisfied. In its opening brief, Centre acknowledges that “the primary obligors and SN Holdings [SNIG] (the guarantor) were released from liability for up to $180 million” in exchange for the Payment. Appellant’s Opening Brief at 13. Consequently, the Release in the PCSA became effective prepetition. 4 The Release provided in pertinent part: Subject to receipt of the Commutation Payment, [Centre] does hereby release and forever discharge the Reinsurers, their predecessors, successors, parents, affiliates, agents, officers, directors and shareholders and assigns from any and all past, present and future payment obligations, adjustments, executions, offsets, actions, causes of action, suits, debts, sums of money, accounts, reckonings, bonds, bills, covenants, contracts, controversies, agreements, promises, damages, judgments, claims, demands, liabilities and/or losses whatsoever, all whether known or unknown, which [Centre] and their successors and assigns ever had, now have, or hereinafter may have, whether grounded in law or equity relating, directly or indirectly, to the terms and conditions of the LPT and Quota Share Agreements . . . . PCSA at 3. In addition, Article III of the PCSA excepted from the Release claims exceeding $180 million, stating that the LPT and Quota Share Agreements remained in full force and effect “with respect to the cession of Losses, Loss Adjustment Expenses and unearned premium reserves, in excess of $180,000,000.” Id. IN THE MATTER OF SNTL 7445 Article X of the PCSA provided that the Release could be revoked by Centre if the PCA or other payments made pursuant to the PCSA were found to be voidable or preferential transfers, stating in pertinent part: In the event that any court of competent jurisdiction or governmental or regulatory authority asserting jurisdiction over the subject matter hereof or the parties hereto enters a final order, judgment, or other finding that: (i) the payment of all or any part of the $22,300,000, described above, or (ii) the payment by Reinsurers of all or any part of the [Payment] of $163,400,000, or (iii) any of the consideration described in the Recitals to this Agreement . . . constitutes a voidable or preferential transfer, such payment constitutes an improper or disproportionate payment, or the payment is otherwise in violation of law or subject to a claim or [sic] preference, then [Centre] may in its sole discretion, in addition to any other remedy provided by law, equity, statute, or contract: (a) enforce this Agreement according to its express terms and conditions; or (b) declare this Agreement to be null and void in its entirety, and thereupon enforce the terms and conditions of the LPT and Quota Share Agreements as though this Agreement (including without limitation the releases and discharges set forth in Articles III and IV) had not been executed . . . . PCSA at 8-9. In March 2000, the Insurance Commissioner for the State of California (the “Commissioner”) placed certain insurance companies affiliated with Debtors into conservation, followed by liquidation. In January 2002 (approximately fourteen months after the petition date), the Commissioner filed a complaint in state court against Centre and others, seeking in part 7446 IN THE MATTER OF SNTL the return of the Payment from Centre as an avoidable preference under state law preference provisions. Centre subsequently agreed to settle that state court litigation, and on February 17, 2005, the state court entered an order approving a settlement agreement between the Commissioner and Centre (among others) providing that the Commissioner’s avoidance action would be dismissed in exchange for Centre’s partial return (in the amount of $110 million) of the Payment. Paragraph F of the state court order indicated that the Commissioner sought to recover property transferred by the insurance companies to Centre and that the Commissioner had sought avoidance of such transfers.5 The order also provided that the settlement agreement between the Commissioner and Centre was “fully and finally approved.” In turn, the settlement agreement itself provided that “[t]he payments to the Liquidator under section III.C.1 of this Settlement Agreement are payments on account of the claims of the Liquidator arising from payments asserted to be preferential transfers . . . and not payments on account of any tort claims.” Settlement Agreement and Mutual Release at 15. In its initial proof of claim filed in November 2000, Centre stated that SNIG’s liability as guarantor was for amounts “in excess of $180,000,000” and reserved the right to seek additional amounts if any portion of the Payment was “deemed void or avoidable,” specifically mentioning the then-pending avoidance action by the Commissioner. The amended proof of 5 Paragraph F provided: “The property that the Liquidator [Commissioner] seeks to recover in the Action (including, without limitation, the property which is the subject of each claim in the Action seeking the avoidance of a transfer of property) is property of one or more of the SNICIL [Superior National Insurance Company, Superior Pacific Casualty Company, California Compensation Insurance Company, Commercial Compensation Casualty Company, and Combined Benefits Insurance Company], which property was transferred to CIC [Centre] (or, in certain instances, certain other defendants) from one or more of the SNICIL.” IN THE MATTER OF SNTL 7447 claim does not specifically mention the avoidance action or its effect on the Release, but as will be shown, the battle is all about Centre’s contention that the amended claim can include the amount paid to the Commissioner as well as postpetition attorneys’ fees. Trustee objected to Centre’s claim and amended claim on many grounds, although only four are relevant to this appeal: (1) Centre’s claim arising from SNIG’s guaranty obligations had been released and could not be revived as Centre had not obtained a judicial finding or judgment that the Payment (or other payment made under the PCSA) constituted a preferential transfer as required by Article X of the PCSA, (2) even if Centre had obtained such a judicial finding or judgment, it has not exercised its right of revocation and no other remedy is available, (3) Centre’s claim arising from SNIG’s guaranty obligations was not contingent but was instead extinguished prepetition under the Release and, under section 502(b), could not be revived by any postpetition determination that the Payment was a preference, and (4) Centre was an unsecured creditor and thus could not assert a claim for attorneys’ fees incurred postpetition. In April 2006, Trustee filed a motion for partial summary judgment that the Release extinguished SNIG’s liability as guarantor, at least up to $180 million, and that Centre could not recover attorneys’ fees incurred postpetition. After conducting a hearing, the bankruptcy court entered a memorandum and order on August 22, 2006, granting the motion on both grounds. The court held that the Release became effective prepetition and Centre did not invoke its power of revocation under Article X prior to the petition date. “Therefore, as of the petition date, the only claim Centre could have had against SNIG is above $180 million.”6 Memorandum of Opinion at pages 12-13. 6 The bankruptcy court noted that Centre was not seeking to nullify the PCSA under subsections (a) through (d) of Article X, but was instead 7448 IN THE MATTER OF SNTL On August 31, 2006, the bankruptcy court entered an order approving a stipulation granting Centre an extension of time to September 21 to file a notice of appeal. Centre thereafter filed its timely notice of appeal. On December 19, 2006, the clerk of this panel issued an order requiring Centre to (1) explain how the order was final, (2) move for leave to file an interlocutory appeal, or (3) obtain a certification of finality from the bankruptcy court pursuant to Federal Rule of Civil Procedure (“FRCP”) 54(b) (made applicable by Rules 7054 and 9014). The bankruptcy court entered its order directing entry of final judgment pursuant to FRCP 54(b) on February 14, 2007, and the panel entered an order on April 23, 2007, treating the order on appeal as final.