Opinion ID: 2054217
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Heading Rank: 4

Heading: Full Faith and Credit Clause Applied to the Facts of this Case: Required Court Permission under Huffines v. American Security & Trust Co. For Execution on Collateral Held by Judgment Lien Creditor Having Priority Over Delaware Receiver

Text: We have now resolved the priority issue. Specifically, we have concluded that Herman gives Smith's judgment lien priority over the claims of the Delaware receiver, that a remand is required to sort out the amount of CUIC's funds that Smith may recover from the garnishee bank, and that, because there was a fraudulent conveyance of CUIC's Connecticut Avenue building to CUG, Smith may foreclose upon its lien on that building. We return now to the permission issue under Huffines: according to District of Columbia law, even a secured creditor must obtain permission from a receivership court to seize or sell the collateral. This suggests several questions. Specifically, (1) does the Full Faith and Credit clause, as interpreted in Clark I and Clark II, require the judgment lien creditor (Smith) to apply for such permission from a receivership court in a foreign jurisdiction (Delaware), even though the receivership court predictably will deny permission and instead seize the property for the debtor's estate, contrary to what a receivership court in the District of Columbia would do under Herman? Or (2) does the Full Faith and Credit clause only require the judgment lien creditor (Smith) to seek permission from a District of Columbia court to take away the collateral, meaning that the District of Columbia court would assume the role of a hypothetical, ancillary receivership court limited to addressing the judgment lien creditor's (Smith's) request by applying whatever criteria a Huffines courtinformed by Herman would use to grant or delay (but not altogether refuse) permission? Or, finally, (3) does the Full Faith and Credit clause impose no limitation on the District of Columbia court's authority to grant permission for the judgment lien creditor (Smith) to take over the collateral immediately, under Herman, since the insurance company (CUIC) and its foreign (Delaware) receiver have not sought formal appointment of an ancillary, District of Columbia receiver? As indicated earlier, we believe that Clark I and Clark II require the courts of this jurisdiction to recognize the status of the Delaware receiver, but to accord that receiver only the same rights and privileges against judgment lien creditors that the District of Columbia would accord a receiver appointed here. Under Huffines, the courts of this jurisdiction would allow the receiver, at most, to delaybut not denyexecution on judgment liens having priority under Herman. [39] Accordingly, Smith's postjudgment liens are entitled to priority over the claims of CUIC's Delaware receiver, but CUIC is entitled to insist that Smith must obtain court permissionmeaning Huffines -type permissionbefore proceeding to enforce its liens. The trial court granted Smith's motion for judgment of recovery for CUIC's funds held by First American and also ruled that Smith may enforce or foreclose upon . . . its lien [on CUIC's Connecticut Avenue building] in partial satisfaction of [its] judgment. In doing so, however, the court ordered automatic and immediateenforcement of Smith's judgment liens applying Herman's priority without addressing the entirely separate question of discretion, under Huffines: whether release of the collateral should be immediate or deferred. In dealing with this issue it is important, first, to recognize that although, on the facts here, Herman gives Smith priority over the Delaware receiver, the bank accounts and building to which Smith is entitled are theoreticallyby virtue of the Full Faith and Credit Clause, as interpreted in Clark I and Clark II in the hands of a hypothetical receiver applying District of Columbia law under Huffines. We say hypothetical receiver to make clear that the Delaware receiver itself does not have jurisdiction over the property. If the District of Columbia, like Delaware, had adopted the UILA, supra note 24, the Delaware receiver appointed in the state of the insurer's [CUIC's] domicile [would be] the successor to the company, and invested with title to all the assets of the company, wherever situated. 19A JOHN ALAN APPLEMAN & JEAN APPLEMAN, INSURANCE LAW AND PRACTICE § 10793 (1982) (foot-note omitted). Because the District of Columbia, however, has not adopted the UILA and is therefore not a reciprocal state, the Delaware receiver is not vested with title to the assets of CUIC that are located in the District of Columbia. See Dean Constr. Co. v. Agricultural Ins. Co., 22 A.D.2d 82, 254 N.Y.S.2d 196, 199 (1964) (Because Empire [a Pennsylvania insurance company] is not, under the [UILA], domiciled in a reciprocal state . . . , the Pennsylvania insurance commissioner is not vested by operation of law with title to Empire's New York property; nor, for that reason, may he sue to recover Empire's assets.). Clark I and Clark II made clear that, under the Full Faith and Credit Clause, the District of Columbia courts are required to give the Delaware receiver the benefit of the substantive law that would apply to a District of Columbia receiver, if appointed under the circumstances here as an ancillary receiver, vis-a-vis Smith's judgment liens; the Full Faith and Credit Clause does not require a District of Columbia court to defer to the jurisdiction of the foreign court or foreign receiver. CUIC, in contending (incorrectly) that the Delaware receiver is seized of the collateral at issue here, did argue in the trial court as a fallback, reflecting a synthesis of Clark I, Clark II, and Huffines, that the trial court in effect acting as a local, ancillary receivershould deny release of the collateral, without prejudice, to afford a breathing spell that might permit CUIC to restructure its business in a way that allows it to address the claims of all policyholders and creditors, including Smith. [40] In other words, CUIC argued that if the Delaware court was not given jurisdiction over the collateral, with the right to apply Delaware law (UILA) granting the receiver, rather than Smith, priority over that collateral, then at least the District of Columbia trial court should exercise Huffines -type discretion to defer execution upon the collateral. The trial court rejected this argument, which CUIC preserved by noting an appeal. In its brief on appeal, CUIC reiterates the argument that, under Huffines, the receivership court must exercise discretion when a judgment lien creditor seeks to enforce its liens against the debtor in receivership, even if the liens predate the receivership. But, rather than suggesting as a fallbackas it did in the trial court, see supra note 40that the trial court itself should impose a Huffines stay, CUIC contends on appeal that, because under Huffines the receivership court itself has the right to control disposition of all liens, authority to enforce the landlord's judgment liens must be obtained from the Delaware receivership court. [41] In making this argument, CUIC ignores the fact that Huffines dealt entirely with a conflict between a creditor and a receiver in the same jurisdiction; CUIC does not leave room for the possibility that Herman, not the UILA, applies and thus that Smith's claims will have priority, as a matter of law, over those of the Delaware receiver. On appeal, therefore, CUIC incorrectly contemplates the Delaware receiver's applying Delaware lawthe UILArather than exercising Huffines -type discretion under District of Columbia law that recognizes a Herman -type priority here. We have already held, however, that Herman's rule of priority applies. Furthermore, Herman makes clear that the court first seized of the collateral is empowered to rule on the applicable lien priorities. See supra note 32. Finally, it would make no sense in any event to permit a Delaware receiver, not seized of the collateral, to apply District of Columbia law in this situation, especially when that lawas this litigation indicatesis not easily discernible and requires an exercise of discretion as a District of Columbia, not a Delaware, court would exercise it. It is true that CUIC has appealed the trial court's refusal to grant a Huffines -type stay (No. 93-CV-61), but in now contending on appeal that the Delaware receivership court, not the trial court, should be responsible for the stay, see supra note 41, CUIC has abandoned its earlier, fallback position, see supra note 40, for which a notice of appeal had been filed. Perhaps CUIC did so recognizing that the appeal period itself, in effect, has resulted in a Huffines -type stay and that the only purpose of the appeal, at this point, is to try in every way to convince this court that (1) the Delaware receivership court and the Delaware receivernot the District of Columbia courtsshould be awarded control of all CUIC's property in which Smith claims a judgment lien; that (2) Delaware's UILA rules, see supra note 24, granting the Delaware receiver's claims priority over Smith's judgment liens, should be applied; and that in any event (3) the law of the District of Columbia gives a foreign or local receiver priority over a judgment lien acquired before creation of the receivership. CUIC's efforts have failed.