Court Opinion

ID: 4695812
Source: CourtListenerOpinion
Date Created: 2021-06-15 20:02:36.626709+00
Date Added: 2024-06-11T08:05:37.404950
License: Public Domain

Filed 6/15/21
                        CERTIFIED FOR PUBLICATION

             IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                            FIRST APPELLATE DISTRICT

                                   DIVISION FIVE

 In re CASTLEPOINT NATIONAL
 INSURANCE COMPANY in
 Liquidation.
 RICARDO LARA, as Insurance
 Commissioner, etc.,
                                               A158646
           Plaintiff and Respondent,
 v.
                                               (San Francisco City and County
 CASTLEPOINT NATIONAL                          Super. Ct. No. CPF16515183)
 INSURANCE COMPANY et al.,
           Defendants and Respondents;
 ALESCO PREFERRED FUNDING
 VIII, LTD., et al.,
           Claimants and Appellants.

           This case concerns the scope of injunctions and releases from a
California insurance insolvency proceeding and whether they bar claims in a
New York lawsuit. The appellants here are some of the plaintiffs in the New
York lawsuit.1 They requested clarification from the San Francisco Superior

       The appellants are Alesco Preferred Funding VIII, Ltd., Alesco
       1

Preferred Funding XI, Ltd., Alesco Preferred Funding XII, Ltd., Alesco
Preferred Funding XIV, Ltd., Hildene Opportunities Master Fund II, Ltd.,
NFC Partners, LLC, Wolf River Opportunity Fund LLC, Wolf River Partner
Fund, and WT Holdings, Inc. The complaint in the New York lawsuit names
additional entities not listed as appellants here. We presume the difference

                                          1
Court as to whether its orders “prohibit or stay” their New York claims. In
the insolvency case, the trial court appointed the California Insurance
Commissioner (Commissioner) as conservator, and later as liquidator, of
CastlePoint National Insurance Company (CastlePoint). As part of this
process, the court issued injunctions and approved releases pertaining to
claims filed against or on behalf of CastlePoint or its assets.
      In May 2019, the San Francisco Superior Court denied the New York
Plaintiffs’ motion, finding “all but one of . . . ten causes of action in the New
York Action are barred by the . . . injunctions issued by this Court and
releases approved by this Court in the underlying CastlePoint liquidation
proceedings.” The New York Plaintiffs appeal.
      Having reviewed the parties’ briefs and the record, including requested
supplemental briefing, we conclude that some of the causes of action in the
New York lawsuit are not barred. The causes of action that may proceed are
those relating to: (i) the alleged breach of so-called “successor obligor
provisions”; and (ii) an alleged $143 million payment from ACP Re, Ltd.
(ACP) to shareholders of Tower Group International, Ltd. (Bermuda) (TGIL).
These causes of action are not asserted against CastlePoint or the insurance
companies that were merged into it. There is no indication the Commissioner
could have asserted these causes of action on behalf of the insolvent
insurance companies. As a result, permitting them to proceed in New York
will not interfere in any meaningful way with the plan for CastlePoint’s
liquidation, especially given the New York Plaintiffs’ agreement not to assert
any judgment against the insolvent insurance companies’ estate or assets.
(Webster v. Superior Court (1988) 46 Cal.3d 338, 350–351 (Webster).)

is not material to the questions we address. Even though there are
additional plaintiffs in New York, we refer to the appellants collectively as
the “New York Plaintiffs.”

                                         2
         But, as we further explain, prior to entering into releases, the
Commissioner could have asserted fraudulent conveyance causes of action
and a cause of action for unjust enrichment because they are based on alleged
improper transfers of assets of the insolvent insurance companies. Those
causes of action are barred by the injunctions and releases in the liquidation
proceeding. As a result, we affirm in part and reverse in part the trial court’s
order.
                   FACTUAL AND PROCEDURAL BACKGROUND
         I.      The California Insolvency Proceeding
         In July 2016, the Commissioner petitioned to be appointed as
conservator of CastlePoint pursuant to section 1011 of the Insurance Code.2
The petition explained that CastlePoint was a property and casualty insurer
owned by Tower Group Inc. (TGI) and an affiliate of an insurance holding
company that consisted of ten insurance companies from six different states
(the Tower Insurance Companies).3 TGIL was their ultimate parent
company.4
         Due to concerns in 2013 about the financial condition of the Tower
Insurance Companies, TGIL’s stock price declined, and TGIL “began
considering options for a sale.” In 2014, ACP, a reinsurer, acquired TGIL and

         2   Undesignated statutory references are to the Insurance Code.
       The ten insurance companies were CastlePoint, Tower Insurance
         3

Company of New York, Tower National Insurance Company, Hermitage
Insurance Company, CastlePoint Florida Insurance Company, North East
Insurance Company, Massachusetts Homeland Insurance Company,
Preserver Insurance Company, York Insurance Company of Maine, and
CastlePoint Insurance Company.
       In their complaint, the New York Plaintiffs refer to this entity as
         4

“Tower Group International, Ltd.” They alleged it “is a company organized
and existing under the laws of Bermuda.” We presume it is the same TGIL
referred to in the Commissioner’s petition.

                                           3
its subsidiaries, including the ten insurance companies. The Michael
Karfunkel Family 2005 Trust (Karfunkel Trust) is the beneficial owner of
ACP. As explained in the petition, ACP “immediately entered into several
related post-closing transactions with AmTrust Financial Services, Inc.”
(AmTrust) “and National General Holdings Corp.” (National General) “under
which certain operating assets of the Tower Insurance Companies were sold
to AmTrust (commercial lines insurance assets) and to National General
(personal lines insurance assets).” The transaction involved affiliates of
AmTrust and National General agreeing “to pay up to $250 million in
additional policyholder claims.”
      Over the next 15 months, the financial condition of the ten insurance
companies continued to deteriorate. In 2016, the Tower Insurance
Companies, TGIL, and ACP worked with insurance regulators from six states
“to develop a plan to address the increasingly distressed financial condition of
the Tower Insurance Companies in a manner that would best protect
policyholders and other creditors.” They agreed the ten insurance companies
would be merged into CastlePoint, which the Commissioner would then place
into conservatorship. “The primary purpose of this consolidation was to allow
for an efficient and orderly conservation process by obviating the need for ten
receivership proceedings (one for each of the ten Tower Insurance
Companies) in six different domiciliary states.”
      With the approval of insurance regulators from the other states, the
Tower Insurance Companies were merged into CastlePoint. After these
mergers, the Commissioner petitioned for appointment as conservator of
CastlePoint.

                                       4
            A.    The Injunctions in the Insolvency Proceeding
      In July 2016, the Commissioner was appointed as conservator. In the
conservation order, the trial court vested in the Commissioner title to all
property and assets of CastlePoint, including rights of action. The
conservation order contains a number of injunctions. In paragraphs 4, 8, 21,
and 22, it enjoins legal proceedings or conduct “interfering with” the
conservator’s possession or management of CastlePoint property or assets.
      Around the same time, the Commissioner entered into a conservation
agreement with a number of entities including AmTrust, National General,
and the Karfunkel Trust. In the motion seeking approval of the conservation
and liquidation plan, the Commissioner explained that approximately $200
million “will be injected into CastlePoint by several parties to the
Conservation Agreement” to provide it “with much needed liquidity to ensure
that policy claims and benefits will continue to be paid during the
conservation period, while the Conservator prepares for the eventual
liquidation of CastlePoint and the resulting transfer of all claims to the
appropriate state insurance guaranty associations . . . . The Conservation
Agreement also provides for CastlePoint to receive run-off administration
services (policy administration and claims administration) free of charge for
up to two years, at an estimated value to CastlePoint of as much as $40
million.”
      Sections 8.1.2(vii) and (viii) of the conservation agreement provide that
the final conservation order will enjoin “all creditors and other interested
parties” from pursuing, “without prior Conservation Court approval,” claims
against entities including the Karfunkel Trust, ACP, AmTrust, and TGIL,
that arise out of “any act or omission by any such Person in connection with
the business or affairs of [CastlePoint] or the Constituent Companies.”

                                        5
      After a hearing in September 2016, the trial court entered an order
approving the conservation and liquidation plan (plan approval order). This
order provides that “the accompanying Conservation Agreement and the
Conservation Transaction Agreements are hereby fully and finally approved
and enforceable in accordance with . . . their provisions, said provisions being
hereby incorporated into this Order.” Paragraph 16 provides that “[a]ll prior
injunctions and other orders of this Court, except to the extent expressly
modified herein, are reaffirmed and remain in full force and effect.”
      Paragraph 22 of the plan approval order contains a broad injunction.
It provides that “[a]ll creditors of CastlePoint and other interested
parties . . . are hereby expressly enjoined from asserting or prosecuting,
without the prior approval of this Court, any legal proceeding against” the
Karfunkel Trust, AmTrust, National General, and others, “arising out
of . . . the management or operations of CastlePoint or its affiliates prior to
the closing of the transactions contemplated by the Conservation Agreement
and the Conservation Transaction Agreements.”
      Paragraph 23 contains a narrower injunction prohibiting actions
against TGIL “in connection with the business or affairs of CastlePoint or the
insurance companies later merged into and with CastlePoint that (1) arises
out of any acts or omissions of such persons occurring after the
consummation of the series of transactions by which [ACP] acquired [TGIL]
and its affiliated insurance companies, and (2) may adversely affect the
assets and operations of CastlePoint, the companies merged with and into
CastlePoint, or the Plan.”
      In March 2017, after a hearing on the liquidation plan, the trial court
found CastlePoint insolvent, terminated the Commissioner’s status as
conservator, and appointed the Commissioner as liquidator (liquidation

                                        6
order). Title to all assets of CastlePoint was vested in the liquidator,
including rights of action.
      Paragraphs 20, 21, 22, and 23 of the liquidation order enjoin legal
proceedings or conduct “interfering with” the liquidator, including the
liquidator’s possession or management of CastlePoint property and assets. In
a handwritten addition, the trial court provided “the injunctions set forth in
paragraph 21 of this Order are not intended to stay any action against third
parties not insured or indemnified by CastlePoint, provided that the parties
in such action shall not pursue, directly or indirectly, recovery on any
resulting judgment from CastlePoint, its assets, or the Liquidator.”
            B.    The Releases in the Insolvency Proceeding
      In September 2016, in conjunction with the conservation agreement,
the Commissioner entered into a release agreement. In section 1.01(a)(i), the
Commissioner released the Karfunkel Trust, ACP, AmTrust, National
General, and other entities, but not TGIL and its subsidiaries, from claims
“that the Conservator or [CastlePoint] now has, owns, or holds, or at any time
had, owned, or held, or may after the execution of this Agreement have, own,
or hold, against any of them in connection with the business or affairs of
[CastlePoint] or the Constituent Companies.”
      Section 1.01(a)(ii) contains a more limited release that applies to TGIL,
releasing it and its subsidiaries’ directors, officers, and other representatives
from claims “that the Conservator or [CastlePoint] now has, owns, or holds,
or at any time had, owned, or held, or may after the execution of this
Agreement have, own, or hold, against any of them, arising out of any acts or
omissions of such persons occurring after the consummation of the
Acquisition Transactions in connection with the business or affairs of
[CastlePoint] or the Constituent Companies.”

                                        7
      In addition, in section 1.01(b) of the release agreement, the
Commissioner released any claim “that the Acquisition Agreements [from
2014] are subject to avoidance as a fraudulent conveyance (as such term is
defined in Section 1034.1 of the California Insurance Code).”5 In the plan
approval order, the trial court approved the conservation agreement and the
conservation transaction agreements and incorporated their provisions.
      II.    The New York Complaint
      In October 2017, the New York Plaintiffs filed a lawsuit in New York
against numerous entities and individuals, including ACP, AmTrust,
National General, TGI, TGIL, the Karfunkel Trust, and members of the
Karfunkel family. The New York Plaintiffs alleged they held trust preferred
securities that defaulted in payment as a result of the “stripping” of valuable
assets from the Tower entities and they sought to recover their losses.
      The New York Plaintiffs “are holders of trust preferred securities”
(TruPS) “with an aggregate principal amount of $175 million.” TruPS are a
form of security issued by trusts created by the borrower. Investors purchase
TruPS from the trust and the purchase proceeds go to the borrower in
exchange for debenture securities. Issuing TruPS is a “tax efficient” way for
insurance companies to maintain surplus capital because “TruPS are treated
like equity for calculating a company’s capital surplus and like debt for tax
purposes.”

      5The acquisition agreements relate to the 2014 transactions whereby,
after ACP acquired TGIL, assets of the ten insurance companies were
transferred to AmTrust and National General. The release agreement
provides that the acquisition agreements include “the Amended and Restated
Commercial Lines Master Agreement by and between ACP Re, Ltd. and
AmTrust Financial Services, Inc., dated as of July 23, 2014,” and “the
Amended and Restated Personal Lines Master Agreement by and between
ACP Re., Ltd. and National General Holdings Corp., dated as of July 23,
2014.”

                                       8
      The borrower’s “obligations are principally set forth in an indenture
governing the debentures issued to the trust. . . . The indentures typically
contain successor obligor provisions that restrict the borrower from merging,
selling, or conveying . . . its stock, property, or assets . . . unless the
purchaser . . . expressly assumes the borrower’s debenture obligations.”
The borrowers also issued guarantees.
      “Defendants Tower Group, Inc.; Preserver Group, Inc.; CastlePoint
Bermuda Holdings, Ltd.; and CastlePoint Management Corp. (the ‘Tower
TruPS Issuers’) created affiliated trusts . . . that issued the TruPS held by
Plaintiffs in this action.” “The Tower TruPS Issuers are subsidiaries of”
TGIL.
      In 2013, the Tower Group revealed it needed “to increase its loss
reserves by over $400 million.” As explained in the complaint, “[l]oss
reserves are a critical measure of financial health for an insurance company
because the reserves represent expected future amounts that the company
will be required to pay on its policies.” In June 2014, “reflecting Tower
Group’s inability to pay its debts as they became due, Tower Group began
deferring interest payments on the debentures underlying the Tower TruPS.”
      It was alleged that members of the Karfunkel family devised a scheme
to acquire the “Tower Group’s valuable business assets . . . without having to
pay or assume any obligations under the Tower TruPS Indentures, in
violation of provisions in the indentures.” The Karfunkel entities allegedly
“at the center of the illegal conduct” are ACP, AmTrust, and National
General.
      In 2014, ACP acquired TGIL for $143 million, and the deal involved
transferring assets to AmTrust and National General. TGIL allegedly
accepted this deal over the proposal of another bidder, even though the

                                          9
alternative bid would have “permitted Tower Group to maintain its valuable
assets while protecting Tower Group’s debt holders, including Tower TruPS
holders.” The sale “benefited TGIL’s shareholders over debt holders.” The
Karfunkels and TGIL failed “to require ACP, AmTrust, or National General
to pay or assume the Tower TruPS Issuers’ obligations under the Tower
TruPS Indentures as part of the Karfunkel acquisitions.”
      The New York complaint acknowledged the existence of the California
insolvency proceedings, recognizing that, in 2016, “the Tower TruPS Issuers’
insurance subsidiaries” were placed into conservation and liquidation.
According to the complaint, these insurance subsidiaries “were all
subsidiaries of the Tower TruPS Issuers and held substantially all of the
issuers’ remaining assets, though at this point in time substantially all of the
valuable assets of the issuers had already been transferred to AmTrust and
National General.”
      In summary, the New York Plaintiffs alleged “the Karfunkels paid
Tower Group’s shareholders . . . $143 million to cede control to the
Karfunkels so they could strip away Tower Group’s ‘well-performing book of
business,’ which realized hundreds of millions in net value to the Karfunkels
in 2014 and 2015 alone, while leaving Tower Group with its poorest-
performing policies and over $228 million in Tower TruPS obligations.” The
New York Plaintiffs asserted ten causes of action, including breach of
contract, tortious interference with contractual relations, breach of fiduciary
duty, fraudulent conveyance, unjust enrichment, and claims of alter ego and
successor liability.
      III.   The Request for Clarification and the Trial Court’s Order
      In response to this complaint in New York, the defendants filed
motions to dismiss arguing the noncontract claims belonged to the

                                       10
Commissioner and were enjoined by orders in the California liquidation
proceedings. In August 2018, the New York court stayed the case pending
the plaintiffs obtaining an order from the California court clarifying that the
New York action is not enjoined.6
      In November 2018, the New York Plaintiffs filed a motion in San
Francisco Superior Court seeking an order “clarifying that the orders” in the
insolvency proceedings “do not prohibit or stay” the New York action. ACP
and other entities and individuals named as defendants in the New York
action (collectively, the New York Defendants) opposed the motion.7 They
argued the San Francisco Superior Court’s injunctions and releases bar the
New York Plaintiffs’ tort claims.
      In response to the motion, the Commissioner filed a “Statement of
Position.” The Commissioner acknowledged the New York Plaintiffs were
“not directly pursuing the assets of the CastlePoint estate.” Consistent with
Webster, supra, 46 Cal.3d at pages 350 to 351, the New York Plaintiffs “have
agreed not to assert any judgment against CastlePoint.” As the result, the
Commissioner determined the injunctions may not bar the New York
Plaintiffs’ claims. But the Commissioner indicated the court should prohibit
the New York Plaintiffs from pursuing released claims.

      6  In their opening brief, the New York Plaintiffs state the stay was
lifted in the New York action and they amended their complaint. We address
some implications of this development in Discussion, section I, post.
      7 The New York complaint names individuals, trusts, and other
organizations that are not named here as respondents. Furthermore, twelve
of the defendants named in the original complaint are no longer part of the
amended complaint in New York. Even though there is not a complete
overlap, we refer to the entities and individuals who opposed the motion in
California as the New York Defendants.

                                       11
      The trial court held a hearing on the motion in March 2019. At the
hearing, counsel for the Commissioner reiterated that, so long as the New
York Plaintiffs made “a binding election not to pursue the assets of
CastlePoint, pursuant to the Webster decision,” their claims did not appear to
violate the injunctions, but they nonetheless may violate the release
agreement. At the hearing, for the first time, the New York Defendants
argued that Avikian v. WTC Financial Corp. (2002) 98 Cal.App.4th 1108
(Avikian) barred the claims. After hearing argument from the parties, the
court ordered supplemental briefing.
      In its supplemental statement, the Commissioner’s position was more
definitive. It stated the New York Plaintiffs’ tort claims “originate from the
lack of funds available to pay the TruPS obligations as a direct result of the
purportedly improper removal of assets from CastlePoint and the Constituent
Companies around 2014 allegedly resulting in their insolvency. The . . . tort
claims appear either to have been released by the Commissioner, or to be
unreleased claims that still belong to the Commissioner, as conservator and
then liquidator of the CastlePoint estate, and are enjoined by the Court’s
prior orders.”
      In May 2019, the trial court denied the motion. The court concluded
that “all but one of . . . ten causes of action in the New York Action are barred
by the outstanding injunctions issued by this Court and releases approved by
this Court in the underlying CastlePoint liquidation proceedings.” As the
trial court explained, “[j]ust as in Avikian, the gist of [the New York
Plaintiffs’] claims in the New York Action is that [the New York Defendants]
looted the assets of CastlePoint, the liquidated entity, and their alleged
injuries therefore are incidental to CastlePoint’s injury.” The New York

                                       12
Plaintiffs filed a motion for reconsideration, which, after a hearing in August
2019, the trial court denied. The New York Plaintiffs appeal.
                                 DISCUSSION
      On appeal, the New York Plaintiffs argue their claims in the New York
action do not violate the injunctions or the releases in the California
insolvency proceedings. We agree in part with the New York Plaintiffs.
      I.    Preliminary Considerations
      The trial court denied the New York Plaintiffs’ “Motion for Order
Clarifying the CastlePoint Stay Does Not Apply to New York Action.” In
doing so, the trial court concluded that most of the causes of action in the
New York complaint “violate the terms of this Court’s injunctions and court-
approved releases, and may not be pursued by” the New York Plaintiffs. The
order enforces the injunctions or releases previously entered and therefore we
construe it as the functional equivalent of an injunction; it enjoins or
prohibits the New York Plaintiffs from pursuing certain claims in New York.
      The nature of this order governs our standard of review. “Courts have
discretion to determine whether to stay an action against the insolvent
insurer and, if so, under what terms and conditions.” (Webster, supra,
46 Cal.3d at p. 350.) At the same time, it is “solely a judicial function to
interpret a written instrument unless the interpretation turns upon the
credibility of extrinsic evidence.” (Parsons v. Bristol Development Co. (1965)
62 Cal.2d 861, 865.) In addition, “whether the trial court correctly
determined its jurisdiction and authority under the” Insurance Code is a
legal question that we review independently. (Garamendi v. Executive Life
Ins. Co. (1993) 17 Cal.App.4th 504, 513.)
      The New York Defendants claim there may not be an appealable final
judgment because the New York Plaintiffs “have not disclaimed the

                                       13
possibility that they will go back to the Superior Court for relief from its
injunctions if they are unsuccessful on this appeal.” But the New York
Plaintiffs state the trial court’s order terminates the action and nothing
remains to be litigated in California. Accordingly, we presume the New York
Plaintiffs will not seek further relief from the trial court.
      We further note that the New York Plaintiffs filed an amended
complaint in New York. At oral argument we questioned whether this
development moots this appeal. We requested supplementing briefing,
including a copy of the amended complaint, and a joint statement regarding
the status of then-pending motions to dismiss. In their joint statement, the
parties explained that the New York trial court ruled on the motions to
dismiss on March 26, 2021, and the parties attached a copy of the decision.
       As neither the amended complaint nor this decision was part of the
record below, we, on our own motion, take judicial notice of them. (Doers v.
Golden Gate Bridge etc. Dist. (1979) 23 Cal.3d 180, 184, fn. 1 [“a reviewing
court may take judicial notice of matters not before the trial court, including
records of another court”].) Among other changes, the amended complaint
adds a second breach of contract claim based on the payment of $143 million
to shareholders of TGIL, and a fraud claim based on an alleged
misrepresentation in a proxy statement.
      In its March 2021 decision, the New York court determined that the
California injunctions do not bar the New York Plaintiffs’ breach of contract
claims or their tortious interference with contract claim because it is “also a
claim relating to the alleged breach of contract,” and it is not asserted against
the insurance companies involved in the conservatorship. However, pending
this appeal, the New York court accorded full faith and credit to the

                                        14
California trial court’s determination that many of the tort claims asserted in
the original complaint were barred.
      Here, we offer additional guidance regarding the types of claims that
the New York Plaintiffs can and cannot pursue as a result of the insolvency
proceedings. Absent a substantial risk of interference with the Commissioner
or the liquidation proceedings, if the claims are not asserted against
CastlePoint, and if the Commissioner could not have asserted the claims on
behalf of CastlePoint, then they are not barred by the injunctions preventing
interference with the Commissioner’s possession or management of
CastlePoint assets. A corollary is that the injunctions and releases do bar the
New York Plaintiffs from asserting claims the Commissioner could have
pursued as conservator of CastlePoint.
      II.   Statutory Framework and Governing Law
      “Although the Constitution gives to Congress the power to provide for
bankruptcies, the Congress has determined that insurance insolvency
proceedings shall be subject to state law. (11 U.S.C. § 109.)” (Garamendi v.
Executive Life Ins. Co., supra, 17 Cal.App.4th at p. 508, fn. 3.)
      If the Commissioner files a verified petition indicating an insurer is
found “to be in a condition that makes its further transaction of business
hazardous to its policyholders, or creditors, or to the public,” the appropriate
superior court shall issue an order “vesting title to all of the assets” of the
insurer in the Commissioner. (§ 1011.) When acting as conservator, the
Commissioner “exercises the state’s police power to carry forward the public
interest and to protect policyholders and creditors of the insolvent insurer.”
(In re Executive Life Ins. Co. (1995) 32 Cal.App.4th 344, 356.) “In exercising
this power, the Commissioner is vested with broad discretion. [Citation.]
This discretion is subject to statutory limitations [citation] and the

                                        15
requirement that the exercise of discretion be neither arbitrary nor
improperly discriminatory.” (Ibid.)
      Once the Commissioner is appointed as conservator or liquidator,
section 1020 “provides that . . . the court has broad powers to enjoin
numerous acts, including the following: (1) interference with the
Commissioner or the proceeding, (2) waste of the company’s assets, (3) the
institution or prosecution of any actions or proceedings, (4) the obtaining of
preferences, judgments, attachments, or other liens against the company or
its assets and (5) the making of any levy against the company or its assets.”
(Garamendi v. Executive Life Ins. Co., supra, 17 Cal.App.4th at p. 514.) This
section “grants the supervising court broad powers to prevent interference
with the conservatorship, including the power to enjoin other matters.”
(Jones v. Golden Eagle Ins. Corp. (2011) 201 Cal.App.4th 139, 146, fn. 5.)
“Section 1020 reflects a legislative intent to preserve an insolvent insurer’s
assets for orderly disposition by the commissioner.” (Webster, supra,
46 Cal.3d at p. 344.)
      The Commissioner’s powers as conservator or liquidator include the
authority to “prosecute and defend any and all suits and other legal
proceedings, and execute, acknowledge and deliver any and all deeds,
assignments, releases and other instruments necessary and proper to
effectuate any sale of any real and personal property or other transaction in
connection with the administration, liquidation, or other disposition of the
assets” of the insurer. (§ 1037, subd. (f).) Like federal bankruptcy law, the
purpose of California’s insurance insolvency provisions is “to ensure the
equitable distribution of an insolvent debtor’s property among creditors, but
it also has ‘the additional and more urgent purpose of protecting an
insurance company’s policyholders, as well as its creditors, by preventing

                                       16
dissipation of the company’s assets when it is found by the Commissioner to
be in a hazardous condition.’ ” (State of California v. Altus Finance (2005)
36 Cal.4th 1284, 1304.)
      III.   The Injunctions and Releases in the Insolvency Proceedings Bar
             Some, but Not All, of the New York Plaintiffs’ Claims
      The New York Plaintiffs claim their tort causes of action can proceed
because they “involve breaches of duties owed by the Issuers and the
Issuers’ alter egos or successors-in-interest . . . . None of these duties was
owed by CastlePoint, and plaintiffs do not seek one cent from CastlePoint’s
coffers.” The New York Plaintiffs claim their “unequivocal Webster
election . . . removes any conceivable basis for finding that the New York
Action violates any CastlePoint injunction.” Regarding the releases, the New
York Plaintiffs argue they “do not seek to recover the funds looted from
CastlePoint—indeed, they do not seek redress for any harm done to
CastlePoint.”
      We agree in part. In Webster, the California Supreme Court held a
personal injury plaintiff was permitted to maintain a civil damages action
against an insolvent insurance company’s liability insurer provided he
elected to recover payment of any judgment only from the liability insurer
and not from the insolvent company’s assets. (Webster, supra, 46 Cal.3d at
p. 350.) Our high court found that allowing the action to proceed would
neither deplete the insolvent insurer’s assets nor disrupt an orderly
distribution. (Ibid.)
      Based on our high court’s analysis in Webster, we focus on whether
allowing the New York Plaintiffs’ claims to proceed will interfere with the
Commissioner by depleting the assets of the CastlePoint estate or disrupting

                                       17
an orderly distribution of those assets.8 With regard to many of the New York
Plaintiffs’ causes of action, we discern no such risk because the claims are not
against CastlePoint or claims the Commissioner could have prosecuted on
behalf of CastlePoint to recover assets for the estate. We address each group
of claims asserted in the original complaint in the New York action.
            A.     The Causes of Action for Breach of Contract and Tortious
                   Interference with Contract
      In their first cause of action, the New York Plaintiffs alleged the Tower
TruPS issuers, TGIL, and ACP “failed to perform the obligations set forth in
the Tower TruPS Indentures and Tower TruPS Guarantees.” More
specifically, there was an alleged failure to comply with “payment obligations
and the Successor Obligor Provisions of the Tower TruPS Indentures.” In
their second cause of action for tortious interference, the New York Plaintiffs
alleged the Karfunkel defendants “interfered with the Tower TruPS
Indentures by causing the Tower TruPS Issuers to violate the Successor
Obligor Provisions of the Tower TruPS Indentures.”9
      In ruling on these causes of action, the trial court noted the parties
agree “the first cause of action for breach of contract . . . is not barred by the
Plan Approval Order, the Liquidation Order, or the Releases.” However,
without analysis, the trial court added the cause of action “appears to be

      8 We do not adopt one argument made by the New York Plaintiffs in
their supplemental briefing to the extent it suggests that the authorization in
section 1020 to enjoin “[i]nterference with the commissioner or the
proceeding” is limited to interference resulting from depleting the assets of
the insolvent insurer. Under the facts of this case, we conclude there is no
significant risk of interference when third party litigation does not require
the active involvement of the Commissioner.
      9 The Karfunkel defendants are defined in paragraph 50 of the
complaint as including ACP, AmTrust, National General, the Karfunkel
Trust, and various members of the Karfunkel family.

                                        18
barred” if asserted against TGIL and ACP. Then, relying primarily on
Avikian, supra, 98 Cal.App.4th at pages 1112 to 1116, the trial court found
the tort causes of action were also “barred by the outstanding injunctions
issued by this Court and [the] releases approved by this court in the
underlying CastlePoint liquidation proceedings.”
      We disagree. The New York Defendants concede the TruPS holders’
claim for breach of contract against the TruPS issuers “ ‘is not a claim
belonging to the estate.’ ” The New York Plaintiffs alleged the terms of the
indentures require successors or acquirers to assume the obligations. Based
on the contract terms, if the New York Plaintiffs can assert a breach of
contract claim against the TruPS issuers, then the claim can also proceed
against TGIL or ACP, entities alleged to be the successors in interest to the
TruPS issuers.
      Similarly, the claim for tortious interference with contract is based on
the same contracts and the New York Plaintiffs seek the same damages;
namely, “all outstanding principal and accrued interest owing under the
Tower TruPS Indentures and the Tower TruPS Trust Agreements.” The
Commissioner complains that allowing claims of this nature to proceed
“would not only threaten the agreement that formed the basis of the initial
Plan, it would also inject uncertainty into the Commissioner’s administration
of the estate.” But, in the release agreement, the Commissioner only agreed
to release claims he had, owned, or held. The Commissioner as conservator
or liquidator of CastlePoint has no interest in the TruPS indentures or any
basis for asserting a claim for tortious interference with these contracts. And
given the New York Plaintiffs’ Webster election, allowing the claim to proceed

                                      19
creates no uncertainty about whether its resolution will impact the assets of
the CastlePoint estate.10
      In concluding otherwise, the trial court relied on Avikian, supra,
98 Cal.App.4th at pages 1112 to 1116, but this reliance was misplaced.
There, the Court of Appeal concluded the plaintiffs’ claims were barred
because they were derivative in nature, and they constituted “claims made on
behalf of” the insolvent insurance company. (Id., at p. 1111.) We recognize
that here, as in Avikian, the original complaint contains allegations
regarding the alleged “stripping” or looting of assets from the underlying
insurance companies, allegations that often cloud the nature of the claims
being asserted. But, in our view, the alleged failure to honor successor
obligor provisions does not depend on the alleged looting of assets from the
underlying insurance companies, nor is there any suggestion the
Commissioner could have pursued, for example, a tortious interference with
contract claim to recover assets for the estate. As a result, Avikian, at pages
1112 to 1116, which concerned claims that belonged to the Commissioner, is
distinguishable. For the same reason, the federal bankruptcy cases cited by
the New York Defendants are distinguishable because they concern claims
that only the bankruptcy trustee could pursue as property of the debtor’s
estate. (See, e.g., In re Emoral, Inc. (3d Cir. 2014) 740 F.3d 875, 879.)

      10 The Commissioner makes the remarkable assertion that allowing the
New York Plaintiffs’ claims to proceed (other than the contract claim) “would
be inequitable” because it would “deny the [New York] Defendants the benefit
of their bargain . . . purchased at a cost of over $200 million.” If the
Commissioner is suggesting he is authorized to sell protection from third
party claims that will not interfere with the liquidation of CastlePoint, he is
mistaken. The Commissioner cites no authority for this proposition, and we
cannot imagine it exists.

                                       20
      Despite some loose pleading in the original complaint, we also disagree
with the Commissioner’s position that claims “based on the successor obligor
provisions of the securities and the $143 million shareholder payment . . . are
derivative of alleged harms to the CastlePoint estate.” These claims may be
factually related to the alleged stripping of assets from the underlying
insurance companies, but they allege independent wrongful conduct. Even if
there was nothing improper about the transfer of assets from the underlying
insurance companies to AmTrust and National General in 2014, the New
York Plaintiffs can still claim to have been harmed by the breach of the
successor obligor provisions and the $143 million payment to TGIL
shareholders. Of course, we offer no opinion on the merits of these claims.
Our point is simply that the New York Plaintiffs allege damages that are not
“merely incidental to the alleged harm inflicted upon” the underlying
insurance companies. (Avikian, supra, 98 Cal.App.4th at p. 1116.)
      We recognize that paragraph 22 of the plan approval order contains a
broad injunction, enjoining “[a]ll creditors of CastlePoint and other interested
parties” from asserting or prosecuting, “without the prior approval of this
Court, any legal proceeding against” the Karfunkel Trust, AmTrust, National
General, and others, “arising out of . . . the management or operations of
CastlePoint or its affiliates prior to the closing of the transactions
contemplated by the conservation agreement and the Conservation
Transaction Agreements.” Similarly, sections 8.1.2(vii) and (viii) of the
conservation agreement contain broad injunctions prohibiting claims against
entities including the Karfunkel Trust, ACP, AmTrust, and TGIL, that arise
out of “any act or omission by any such Person in connection with the
business or affairs of [CastlePoint, and] . . . the Constituent Companies.”

                                        21
      But causes of action based on the failure to honor the obligations in the
TruPS contracts do not concern the management, operations, business, or
affairs of the underlying insurance companies. They are outside the scope of
these injunctions. Instead, they are consistent with the handwritten carve-
out added to the liquidation order because they are not asserted against
entities “insured or indemnified by CastlePoint,” and the New York Plaintiffs
have agreed not to seek “recovery on any resulting judgment from
CastlePoint, its assets, or the Liquidator.” In sum, allowing the contract-
based claims to go forward against the TruPS issuers, TGIL, ACP, or the
Karfunkel defendants will not deplete the assets of the CastlePoint estate or
disrupt an orderly distribution of those assets in the CastlePoint liquidation.
(Webster, supra, 46 Cal.3d at p. 350.) For these reasons, the claims are not
barred.11
            B.    The Causes of Action for Breach of Fiduciary Duty
      In the third cause of action, the New York Plaintiffs alleged ACP, and
various groups of director and officer defendants, breached their fiduciary
duties to the TruPS holders by, among other things, “providing for
substantial payments to shareholders of TGIL without providing for the
assumption or adequate means for repayment of the debentures underlying
the Tower TruPS Indentures.” In their fourth cause of action, it was alleged
the Karfunkel defendants aided and abetted these breaches of fiduciary duty.
      Clearly, these causes of action are not against CastlePoint, nor is there
any indication the Commissioner could have pursued them on behalf of

      11The Commissioner expresses concern regarding “the costs associated
with monitoring and ensuring that the extensive litigation [in New York]
does not encroach on the CastlePoint estate, or upon the Commissioner’s
agreements.” However, based on the terms and conditions we impose below,
we conclude these costs will not be extensive.

                                      22
CastlePoint. We acknowledge, as the New York Defendants point out, that
the allegations in the original complaint often intertwine the alleged
improper payment to TGIL shareholders with the alleged looting of the
CastlePoint assets. Nevertheless, we discern no necessary connection
between the two. Indeed, the New York Defendants concede “a claim that the
Plaintiffs have a right to the $143 [million] payment that ACP made to
TGIL’s shareholders would not, standing alone, be property of the estate.” So
construed, we are not persuaded that allowing these claims to proceed in New
York will deplete the assets of the CastlePoint estate or disrupt the
liquidation plan. (Webster, supra, 46 Cal.3d at p. 350.) As a result, the
breach of fiduciary duty causes of action are not barred.
            C.    The Fraudulent Conveyance Causes of Action
      The fifth, sixth, and seventh causes of action alleged the Tower TruPS
issuers made conveyances to the Karfunkel defendants at a time when the
issuers were insolvent, or that they were made insolvent by these
conveyances, and the sixth cause of action refers to the transfer of assets to
ACP, AmTrust, and National General, and the “cherry-picking” of “valuable
Tower Group assets while leaving poorly performing assets.” The New York
Plaintiffs “seek to avoid all . . . conveyances made by the Tower TruPS
Issuers to the Karfunkel Defendants.” They also seek to hold the “Karfunkel
Defendants, the Tower TruPS Issuers, and TGIL . . . liable . . . for damages
incurred as a result of their participation in the conspiracy to commit
fraudulent conveyance of the Tower TruPS Issuers’ property to ACP,
AmTrust, and National General.”
      We agree with the trial court that the New York Plaintiffs are
prohibited from asserting these causes of action in New York. By statute, the
Commissioner has the power to avoid fraudulent transfers. (§ 1034.1.) In

                                       23
section 1.01(b) of the release agreement, the Commissioner expressly
released any claim “that the Acquisition Agreements [whereby AmTrust and
National General acquired assets of the insurance companies] are subject to
avoidance as a fraudulent conveyance.” Accordingly, this release bars the
fraudulent conveyance causes of action.
      These causes of action belonged to the Commissioner. If CastlePoint or
the insurance companies merged into it had rights of action based on the
transfer of assets out of them, then those claims became the Commissioner’s
when he was appointed conservator of CastlePoint. It was the
Commissioner’s role to investigate the financial condition of CastlePoint and
prosecute claims, if necessary, for the sake of “marshalling the assets of an
insolvent insurer in order to pay claims.” (Arthur Andersen v. Superior Court
(1998) 67 Cal.App.4th 1481, 1486.)
      Here, instead of prosecuting claims that belonged to the Commissioner,
the Commissioner released them in exchange for significant benefits. Among
other things, the Commissioner received a cash infusion of $200 million to
“provide CastlePoint with much needed liquidity to ensure that policy claims
and benefits [would] continue to be paid during the conservation period”
while the Commissioner prepared “for the eventual liquidation of CastlePoint
and the resulting transfer of all claims to the appropriate state insurance
guaranty associations.” Indeed, “[a]t the time it was placed into
conservation . . . CastlePoint had only a few weeks of liquidity available to
pay insurance claims. Accordingly, a cornerstone of the Plan was that the
Karfunkel Trust agreed to pay $200 million into the estate,” and related
entities “would provide free claim handling services to the estate for two
years, a potential $40 million benefit.” We find no abuse of discretion in the
Commissioner’s decision to release claims associated with the transfer of

                                       24
assets for the sake of effectuating an orderly conservation and liquidation of
CastlePoint. (In re Executive Life Ins. Co., supra, 32 Cal.App.4th at p. 356
[when acting as conservator, Commissioner vested with broad discretion].)
      The fraudulent conveyance causes of action also violate the injunctions
preventing interference with the Commissioner’s possession and
management of CastlePoint assets. It is not clear, for example, how any
attempt to undo or remedy the alleged fraudulent conveyances would
proceed—as they concerned transfers to AmTrust and National General of
“renewal rights . . . for commercial lines business and . . . for personal lines
business.” Allowing the New York Plaintiffs to prosecute these claims in New
York would likely require the Commissioner’s significant involvement in this
“business litigation case,” thereby disrupting the liquidation plan. (Webster,
supra, 46 Cal.3d at p. 353.) For these reasons, we agree with the trial court
that the fraudulent conveyance causes of action are barred.
            D.     The Cause of Action for Unjust Enrichment
      In their eighth cause of action for quantum meruit, the New York
Plaintiffs seek restitution because “[t]he Karfunkel Defendants benefitted
when ACP, AmTrust, and National General acquired the Tower TruPS
Issuers’ valuable assets,” and, they did so at plaintiffs’ expense because “the
Tower TruPS Issuers lost access to valuable assets that would have
contributed to repaying Tower Group’s TruPS.” But, of course, as explained
earlier in the complaint, these “valuable assets” were the assets of the
issuers’ “wholly owned insurance subsidiaries.”
      Like the fraudulent conveyance claims, we conclude this cause of action
belonged to the Commissioner. It is asserted against the Karfunkel
defendants and it is focused on the transfer of insurance assets to AmTrust
and National General. The insurance companies’ rights of action based on

                                        25
those transfers became the Commissioner’s when he was appointed
conservator of CastlePoint. But, in section 1.01(a)(i) of the release
agreement, the Commissioner, as conservator, released claims it had, owned,
or held against the Karfunkel Trust, ACP, AmTrust, National General, and
other entities, “in connection with the business or affairs of [CastlePoint] or
the Constituent Companies.”
      In addition, this cause of action is barred by injunctions in the
liquidation proceedings. For example, the injunctions in paragraphs 20 to
23 of the liquidation order enjoin all persons from interfering with the
Commissioner’s conduct of his duties as liquidator, or from “doing any act or
other thing whatsoever to interfere with the possession of or management by
the Liquidator of the property and assets” of CastlePoint.
      There can be no doubt the court has authority to issue injunctions of
this kind. As explained by our high court, “if . . . a policyholder attempted a
common law action seeking restitution as a remedy to restore property lost by
an insolvent insurance company, such an action would be precluded by
Insurance Code section 1037, subdivision (f). The suit would fall squarely
within the exclusive role of the Commissioner, as conservator and trustee, to
‘prosecute and defend any and all suits and other legal proceedings’
pertaining to the insolvent insurer’s property and business.” (State of
California v. Altus Finance, supra, 36 Cal.4th at p. 1305.)
      Here, in the unjust enrichment cause of action, the New York Plaintiffs
seek to remedy the TruPS issuers’ “lost access to valuable assets.” By doing
so, they seek to usurp a function that is “quintessentially within the scope of
the Commissioner’s power as conservator and trustee of the insolvent
company.” (State of California v. Altus Finance, supra, 36 Cal.4th at p. 1305.)
The cause of action is barred.

                                       26
            E.    Alter Ego and Successor Liability
      The ninth and tenth causes of action for alter ego and successor
liability seek to hold members of the Karfunkel family and ACP liable for the
obligations of numerous entities including the Tower TruPS issuers. To the
extent these claims concern the alleged breach of the successor obligor
provisions or the $143 million payment by ACP to TGIL shareholders, there
is no indication that allowing them to proceed in New York will deplete the
assets of the CastlePoint estate or disrupt the liquidation plan. (Webster,
supra, 46 Cal.3d at p. 350.) In so concluding, we offer no opinion on the
merits of these claims.
      IV.   Terms and Conditions
      “Courts have discretion to determine whether to stay an action against
the insolvent insurer and, if so, under what terms and conditions.” (Webster,
supra, 46 Cal.3d at p. 350.) Like in Webster, we impose a number of terms
and conditions regarding the claims that the New York Plaintiffs may pursue
in New York.
      First, the New York Plaintiffs must make a binding election not to seek
recovery from CastlePoint assets or assets distributed or to be distributed by
the Commissioner as part of the plan for CastlePoint’s liquidation. Second,
like the condition imposed by the trial court in its May 16, 2019 order, the
New York Plaintiffs must make discovery requests, if any, informally to the
Commissioner, rather than through formal legal processes that would
increase the costs to CastlePoint. Having found that the claims that can
proceed in New York relating to alleged breaches of the successor obligor
provisions and the $143 million payment to shareholders of TGIL are distinct
from the allegations of improper transfers of CastlePoint assets, we

                                      27
anticipate that discovery requests made to the Commissioner, if any, should
be minimal.
                                DISPOSITION
      We affirm in part and reverse in part. The California insolvency
proceedings relating to CastlePoint do not bar the New York Plaintiffs from
asserting the following causes of action: (i) breach of contract against the
TruPS issuers, TGIL, and ACP; (ii) tortious interference with contract
against the Karfunkel defendants; (iii) breach of fiduciary duty against ACP
and various director and officer defendants; (iv) aiding and abetting breach of
fiduciary duty against the Karfunkel defendants; (v) alter ego liability
against members of the Karfunkel family and ACP; and (vi) successor
liability against the Karfunkel defendants.
      However, the California insolvency proceedings relating to CastlePoint
bar the New York Plaintiffs from asserting the following causes of action:
(i) fraudulent conveyance against the Karfunkel defendants and the Tower
Group; (ii) conveyance made with intent to defraud against the Karfunkel
defendants and the Tower Group; (iii) conspiracy to commit fraudulent
conveyance against the Karfunkel defendants, the Tower TruPS issuers, and
TGIL; and (iv) quantum meruit/unjust enrichment against the Karfunkel
defendants.
      With regard to the causes of action that are not barred, the New York
Plaintiffs may pursue them only in accordance with the terms and conditions
outlined in the opinion.
      Each side shall bear its own costs on appeal. (Cal. Rules of Court, rule
8.278(a).)

                                       28
                                              _________________________
                                              Seligman, J.*

     WE CONCUR:

     _________________________
     Simons, Acting P. J.

     _________________________
     Burns, J.

     A158646

     * Judge of the Superior Court of Alameda County, assigned by the Chief
Justice pursuant to article VI, section 6 of the California Constitution.

                                    29
Trial Court: San Francisco City and County Superior Court

Trial Judge: Hon. Ethan P. Schulman

Counsel:

Murphy Rosen and Paul D. Murphy; Wollmuth Maher & Deutsch, Jay S.
Handlin; Greines, Martin, Stein & Richland, Robin Meadow and Laurie J.
Hepler, for Claimants and Appellants Alesco Preferred Funding VIII, Ltd.,
Alesco Preferred Funding XI, Ltd., Alesco Preferred Funding XII, Ltd., Alesco
Preferred Funding XIV, Ltd., Hildene Opportunities Master Fund II, Ltd.,
NFC Partners, LLC, Wolf River Opportunity Fund LLC, Wolf River Partner
Fund, and WT Holdings, Inc.

Xavier Becerra, Attorney General, Karen W. Yiu and Lucy F. Wang, Deputy
Attorneys General; Orrick, Herrington & Sutcliffe, Cynthia J. Larsen, for
Plaintiff and Respondent Insurance Commissioner.

Reed Smith, Jesse L. Miller and Maytak Chin; Debevoise & Plimpton, Carl
Micarelli pro hac vice, for defendants and respondents ACP Re, Ltd., ACP Re
Holdings, LLC, AmTrust Financial Services, Inc., CastlePoint Bermuda
Holdings, Ltd., CastlePoint Management Corp., Integon National Insurance
Company, National General Holdings Corp., Preserver Group, Inc.,
Technology Insurance Company, Inc., Tower Group, Inc., Tower Group
International, Ltd., William F. Dove, William F. Fox, Jr., William E.
Hitselberger, Michael H. Lee, Herbert Lemmer, Elliot S. Orol, William A.
Robbie, James E. Roberts, Steven W. Schuster, Robert S. Smith, Jan R. Van
Gorder, Austin P. Young, III, Meghan Zeigler, George Karfunkel, Leah
Karfunkel, Estate of Michael Karfunkel, Barry Zyskind, Michael Karfunkel
Family 2005 Trust, and Michael Karfunkel 2005 Grantor Retained Annuity
Trust.

                                     30