Opinion ID: 1515959
Heading Depth: 1
Heading Rank: 2

Heading: Administration Costs

Text: We now address whether the payments to the AFIA Cedents under the proposed agreement constitute administration costs under RSA 402-C:44, I. As noted, RSA 402-C:44 provides that Class I claims must be paid in full before distributions may be made to any other classes. Class I claims include claims for administrative costs and expenses, which are: [t]he costs and expenses of administration, including but not limited to the following: the actual and necessary costs of preserving or recovering the assets of the insurer; compensation for all services rendered in the liquidation; any necessary filing fees; the fees and mileage payable to witnesses; and reasonable attorney's fees. RSA 402-C:44, I (emphasis added). Class V claims are [a]ll other claims including claims of any state or local government, not falling within other classes. . . . RSA 402-C:44, V. In ruling that the payments to the AFIA Cedents are Class I administrative costs, the superior court noted that the provisions of RSA chapter 402-C are to be liberally construed and that the purpose of the statute is to protect insureds, creditors and the general public. It also considered the nature and complexity of . . . [Home's] insurance and reinsurance business, and that its substantial involvement in the London market posed significant challenges to the Liquidator. The court recognized the circumstances which put collection of the asset at risk, particularly the fact that the AFIA Cedents would have little reason to file and prosecute claims if neither setoff nor actual distribution were likely. In support of this position, the court cited to the testimony of the JPL team members. The superior court found that, under RSA 402-C:44, I, the structure of the agreement was necessary to preserve and recover assets. It also stated that with the agreement the Liquidator would be able `to marshal assets to be distributed to creditors which would otherwise be unavailable.' The ACE Companies and BMC argue that the superior court's ruling that the payments to the AFIA Cedents are administration costs is contrary to the language and clear intent of RSA 402-C:44, I. They first contend that the proposed payments to the AFIA Cedents cannot be qualified as administration costs because they arose from the pre-liquidation AFIA contracts, and that administration costs only arise from post-liquidation transactions. Second, they argue that the proposed agreement creates an impermissible subclass by splitting the Class V creditors into two groups. Third, the ACE Companies and BMC challenge the superior court's ruling that the payments to the AFIA Cedents were necessary costs of preserving Home's estate. In arguing that the proposed payments to the AFIA Cedents cannot be qualified as administration costs because they arose from pre-liquidation transactions, the ACE Companies rely upon a line of bankruptcy cases holding that administration costs include only rights to payment that arise post-liquidation, and exclude claims that arise pre-liquidation. See Mass Div. of Empl. and Training v. Boston Reg'l Med. Ctr., 291 F.3d 111, 125 (1st Cir.2002); Woburn Assoc. v. Kahn (In re Hemingway Transport, Inc.), 954 F.2d 1, 5 (1st Cir.1992); In re Food Barn Stores, Inc., 175 B.R. 723, 728 (Bankr.W.D.Mo. 1994). They urge us to apply the reasoning of the bankruptcy cases here, contending that the proposed agreement is based upon the AFIA Cedents' claims against Home, which arose from the pre-liquidation AFIA treaties. The bankruptcy cases cited above involved the interpretation of 11 U.S.C.A. § 503 (Supp.2006). Entitled Allowance of administrative expenses, 11 U.S.C.A. § 503(b)(1)-(8) enumerates a list of items that may be considered administrative expenses, such as wages, salaries, and commissions for services rendered after the commencement of the case; id. § 503(b)(1)(A)(i), and reasonable compensation for professional services rendered by an attorney or an accountant of an entity whose expense is allowable by statute, id. § 503(b)(4). We are not persuaded that the interpretation of administrative expenses in bankruptcy cases applies to the definition of administration costs in RSA 402-C:44, I. A comparison of the language of the respective statutes reveals that they differ in terms of what is meant by administrative costs and expenses. Unlike the bankruptcy statute, which contains a specific list of items that constitute administrative expenses, RSA 402-C:44, I, defines administration costs more generally by including the actual and necessary costs of preserving or recovering the assets of the insurer. This definition encompasses a much broader category of items and transactions than is found in the bankruptcy code. Even if we were to assume that claims and rights to payment that arise pre-liquidation cannot constitute administration costs under RSA 402-C:44, I, we are not persuaded that the proposed payments to the AFIA Cedents arose pre-liquidation. The proposed payments do not arise from the AFIA Cedents' Class V claims themselves, but rather as an inducement for the AFIA Cedents to file claims in the liquidation in order to bring a net benefit to creditors of the estate. Thus, while the AFIA Cedents' claims against Home arose pre-liquidation, their right to payment under the proposed agreement will arise post-liquidation. The ACE companies and BMC rely upon an insurance liquidation case in which the Georgia Court of Appeals refused to qualify claims that arose from pre-liquidation transactions as administrative expenses. See Oxendine v. Comm'r of Ins. of North Carolina, 229 Ga.App. 604, 494 S.E.2d 545 (1997). They argue that the proposed payments to the AFIA Cedents are akin to the pre-liquidation claims in Oxendine, and cannot be classified as administrative costs. We disagree. In Oxendine, the Georgia Commissioner of Insurance (GCI) had settled claims of the North Carolina Commissioner of Insurance (NCCI) and FICA Marketing, Inc. (FICA) against an insurer during a court-approved rehabilitation of the insurer. Id. at 546-47. The rehabilitation efforts failed and the insurer was declared insolvent. Id. at 547. NCCI and FICA then asserted that their claims against the insolvent insurer were entitled to priority status as costs and expenses of administration. Id. The trial court overseeing the liquidation agreed, and GCI appealed. Id. The Oxendine court reversed. Interpreting a provision similar to RSA 402-C:44, I, see GA.CODE ANN. § 33-37-41(1)(2005), it ruled that [n]o reasonable definition of `costs' or `expenses' can include the claims which [NCCI and FICA] assert. These claims are for money which [NCCI and FICA] claim from [the insurance company's] estate and not administrative costs and expenses incurred. Id. at 548. Oxendine held that giving the claims of NCCI and FICA priority as Class I administrative expenses violated the mandatory priority set forth in the liquidation statute. Id. We disagree with the ACE Companies and BMC that Oxendine applies to this case. In Oxendine, the claims brought by NCCI and FICA were settled claims against the insurer that arose pre-liquidation. The liquidation of the insurer did not change the fact that NCCI and FICA still had unpaid claims against the insurer that arose from their pre-liquidation right to payment. In this case, unlike in Oxendine, the AFIA Cedents' right to proposed payments will arise post-liquidation, based upon the proposed agreement. While the AFIA Cedents' Class V claims arose pre-liquidation, their right to payment for filing these claims in the liquidation proceeding will arise post-liquidation. Moreover, we disagree that the proposed agreement creates an impermissible subclass by splitting Class V into two groups. Payments of Class I administration costs, by definition, do not constitute a distribution to a lower priority class, and therefore do not create a subclass of lower priority creditors. The ACE Companies argue that even if the payments are administration costs, the superior court erred by ruling that they are necessary costs of preserving and recovering the assets of Home, within the meaning of RSA 402-C:44, I. After an evidentiary hearing, the superior court found that the proposed agreement was necessary because the Liquidator could not have marshaled this asset absent the contingent payments. . . . It also ruled that the Liquidator has met his burden of proving that a reasonable liquidator under the circumstances would have concluded that the agreement was necessary to preserve access to and marshal the AFIA reinsurances. First, the ACE Companies argue that the [s]uperior [c]ourt applied the wrong standard in determining the necessity issue. They contend that the proper standard is whether the AFIA Cedents, in the absence of the [Proposed] Agreement, would have filed and prosecuted their claims. They argue that the superior court erroneously applied the standard of whether it was reasonable for the Liquidator to conclude that an agreement with the AFIA Cedents was necessary. . . . RSA 402-C:25, VI provides that the liquidator may take measures that are necessary or expedient to collect, conserve or protect [the insurer's] assets or property. . . . We will assume, as the ACE Companies argue, that the appropriate standard is whether the AFIA Cedents, in the absence of the proposed agreement, would have filed and prosecuted their claims. In light of the superior court's finding that the Liquidator could not have marshaled [$231 million in reinsurance payments on the AFIA Cedents' claims] absent the contingent payments, we are not persuaded that the superior court applied the incorrect standard in determining the necessity of the proposed agreement. Next, the ACE Companies and BMC argue that [a]n objective examination of the evidence reveals that the AFIA Cedents would have filed and prosecuted claims even in the absence of the Proposed Agreement. They contend that the AFIA Cedents had several incentives for the filing and prosecution of reinsurance claims, including the preservation of set off, tax concerns and the possibility of a better than expected return for the estate. They also assert that the AFIA Cedents' prosecution of their pre-liquidation claims would not cease once the level of setoff is reached . . ., nor would it be difficult or costly to prosecute the claims. Finally, the ACE Companies argue that the superior court erred by finding that there was significant legal uncertainty as to whether the AFIA Cedents could negotiate a cut-through deal with the ACE Companies because, under the terms of the assumption agreement, the AFIA Cedents could not legally negotiate a cut-through deal. The liquidator contends that the superior court made a factual finding that the AFIA Cedents would not file and prosecute claims in excess of offset without an incentive. The liquidator asserts that the testimony at the evidentiary hearing that the court found to be credible amply supports the conclusion that the agreement was necessary. Further, the liquidator asserts that the superior court properly found that there was uncertainty over potential direct dealing between [the ACE Companies] and [the] AFIA Cedents to circumvent Home. He argues that Nationwide Mutual Insurance. Co. v. Home Ins. Co., 150 F.3d 545 (6th Cir.1998), cert. denied, 525 U.S. 1140, 119 S.Ct. 1030, 143 L.Ed.2d 39 (1999), left open the status of cut through litigation, while Koken v. Legion Insurance. Co., 831 A.2d 1196, 1236 (Pa.Commw.Ct.2003), showed cut through litigation is allowable on particular facts, and thus the Court had ample reason to conclude that direct dealing was a credible threat. We will uphold the superior court's findings and rulings unless they lack evidential support or are legally erroneous. Cook v. Sullivan, 149 N.H. 774, 780, 829 A.2d 1059 (2003). We defer to the superior court's resolution of conflicting testimony, evaluation of credibility, and determination of the weight to be given evidence. Id. After reviewing the record, we conclude that there was sufficient evidence to support the superior court's finding that the AFIA Cedents would not file and prosecute claims without a financial incentive. In particular, JPL team member Sarah Ellis testified that she interviewed representatives of several AFIA Cedent companies who informed her that because they were subordinated creditors, they saw no economic benefit to submitting claims to the Home Estate. JPL team member Gareth Hughes testified about his concern that creditors would have no economic incentive for prosecuting their claims. In addition, there was sufficient evidence to support the court's conclusion that cut-through litigation was a threat. Both Sarah Ellis and Gareth Hughes testified that the AFIA Cedents were in talks to form side agreements with the ACE Companies. Furthermore, we agree that the Nationwide decision leaves uncertainty as to whether cut-through deals between the ACE Companies and the AFIA Cedents are legally permissible. In that case, Nationwide Mutual Insurance Company (Nationwide) purchased reinsurance from Home, which at that time was a member of the AFIA. Nationwide Mutual Ins. Co., 150 F.3d at 546-47 & n. 2. Subsequently, CIGNA Insurance Company and its subsidiaries (the CIGNA defendants) entered into an assumption agreement with Home and the other members of the AFIA, wherein it agreed to purchase all interests in and rights to the policies and contracts that Home and the other AFIA members entered into through the AFIA pool. Id. at 547. The assumption agreement at issue in Nationwide is the same assumption agreement in this case. Nationwide sued both Home and the CIGNA defendants, alleging that Home and the CIGNA defendants had breached reinsurance contracts under which they were responsible for paying certain claims filed against Nationwide. Id. at 546. The district court referred Nationwide's claims against both Home and the CIGNA defendants to arbitration, and dismissed the entire case. See id. at 547. The CIGNA defendants appealed. The primary issue on appeal was whether the district court erred in concluding that Nationwide could bring a claim directly against the CIGNA defendants by virtue of the CIGNA defendants' assumption of the reinsurance contract between Nationwide and Home. . . . Id. at 548. The appeals court concluded that Nationwide could not bring a claim directly against CIGNA. Id. The court interpreted disclaimer language in the assumption agreement and held that the language unequivocally: bars any person or entity, except the parties to the Assumption Agreement (the members of AFIA and the CIGNA defendants), from suing on any of the obligations undertaken pursuant to the Assumption Agreement, including the CIGNA defendants' obligation to make payments on the reinsurance contract between Nationwide and Home. Id. (emphasis added). Despite this holding, the court acknowledged that Home's insolvency could affect the parties' respective rights and obligations. Id. at 549. The court did not address this issue, however, because it concluded the issue was not ripe for review. Id. Although the disclaimer language in the assumption agreement technically bars cut-through litigation by the AFIA Cedents, the Nationwide decision is silent on the issue of whether it would be permissible for the AFIA Cedents to deal directly with the ACE Companies outside of court subsequent to Home's insolvency. Moreover, the facts and circumstances have changed since Nationwide. Most significantly, Home is now insolvent. In light of the appeals court's decision in Nationwide, whether or not the AFIA Cedents can pursue cut-through litigation or deal directly with the ACE Companies is an open question. While we conclude that the evidence supports the superior court's finding that the proposed agreement was necessary, there are also significant policy reasons that reinforce the court's decision. As noted previously, the purpose of RSA chapter 402-C is to protect preferred creditors by reserving assets for them, including people insured by Home, and people with claims against those insured by Home. See RSA 402-C:1, IV. RSA 402-C:1, III provides that the statute should be liberally construed to effectuate this purpose. Further, RSA 402-C:25 grants the liquidator broad authority to collect the assets of an insolvent insurer. A liberal construction of the statutory language supports a finding that the proposed payments to the AFIA Cedents are necessary to collect and preserve assets of Home's estate. By contrast, the ACE Companies' and BMC's reading of the statute would prevent collection of additional assets by barring payment of necessary costs. As a final point, there is no doubt that the ACE Companies would reap a substantial windfall in the absence of the proposed agreement by depriving Home's creditors of the amounts they would have paid but for Home's insolvency. This would frustrate the legislative purpose of obtaining full payment from reinsurers despite an insurer's insolvency. See RSA 402-C:36; see also RSA 405:49, I (2006)(Reinsurance Insolvency). Accordingly, for the foregoing reasons, we conclude that the payments to the AFIA Cedents under the proposed agreement constitute administration costs under RSA 402-C:44, I.